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ECB’s Constancio Says Bank Health Checks Will Be Vital Test

The European Central Bank will thoroughly probe banks’ balance sheets as it prepares to assume oversight powers, seeking to reassure markets of the robustness of euro-area lenders.

The assessments, a requirement set out in the law handing the central bank oversight powers, are “a critical moment and a vital challenge” for the single supervisor, ECB Vice President Vitor Constancio said in Brussels today.

The ECB must “deliver that assessment in a way that can convince markets and can really change the situation of the banks,” he said at a conference.

The Frankfurt-based central bank is set to take on bank oversight powers next year as part of a bid by the 17 nations of the euro area to untie the solvency of banks and sovereigns. EU leaders agreed last year that the supervisor should be a first step in building a so-called banking union with common oversight and centralized crisis-response measures for lenders.

“We have to guarantee that the European banking sector has a balance sheet that is healthy, robust and in a condition to jumpstart credit growth,” Constancio said.

Constancio said that the asset health checks won’t be directly linked with the next round of EU-wide bank stress tests organized by the London-based European Banking Authority.

Stress Tests

“These are two separate things,” he told reporters after the conference. “The assessment of balance sheet and asset quality is an exercise in itself with a different methodology from the normal stress tests that have been conducted in the past few years,” he said. “So these two things will happen, both of them.”

“There will be also stress tests, the normal ones, as before, under the umbrella of the EBA,” he said. The timing of the two exercises is under discussion, with a decision to be announced shortly, he added.

“My own view is that it would be better to have the balance sheet assessment before the stress tests, but it can work either way,” he said.

Constancio and ECB Executive Board member Benoit Coeure both urged swift progress by the euro area in establishing a broader banking union with a single resolution authority and common backstops for dealing with failing banks.

Any delay in creating a single European bank resolution mechanism would be “damaging for growth and damaging for jobs,” Coeure said. The banking union also needs a common approach to protecting bank depositors, he said.

Constancio told EU lawmakers yesterday that he favored setting up a central bank resolution authority on a similar basis as the U.S. Federal Deposit Insurance Corp., with an ability to access public money as a last resort.

The European Stability Mechanism, the euro area’s firewall fund for sovereigns, “could be the basis to provide that backstop,” Constancio said.

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