The European Central Bank is set to take center stage as the euro area’s chief banking supervisor, after the European Banking Authority ditched this year’s stress test in favor of an ECB-led review of lenders’ asset quality.
The London-based EBA, set up in 2011 to harmonize rules across the European Union, delayed stress tests until 2014 as the ECB’s asset check goes ahead to “help dispel concerns over the deterioration of asset quality due to macroeconomic conditions in Europe,” the agency said a statement yesterday.
“The EBA stress tests were really dependent on whether the ECB was ready to do its own asset quality review in the second half of the year,” said Andrew Stimpson, a London-based banking analyst at Keefe Bruyette & Woods Ltd. “I think the market will still take it positively in the short term,” he said. “We don’t really think that banks need more capital but if investors were, then it’s the ECB test that they should be more interested in.”
Leaders of the bloc’s 27 nations agreed last year that the central bank should become a regulator in a bid to ease the euro area’s fiscal crisis by bolstering investor confidence and breaking the link between bank solvency and national public finances. The EBA carried out the last formal EU stress tests in 2011, which were criticized for failing to catch problems at the lenders.
Eight banks failed the exams with a combined shortfall of 2.5 billion euros ($3.2 billion). Investors expected as many as 15 banks to fail and raise 29 billion euros after assessments, according to a survey by Goldman Sachs Group Inc. Dexia SA, the French-Belgian lender, received a clean bill of health and then failed after a bank run three months later.
“Clearly the ECB is keen to make sure that it has done its utmost to make a comprehensive assessment of the state of the banks over which it will have supervisory responsibility from next year,” said Richard Reid, a research fellow for finance and regulation at the University of Dundee in Scotland. “But as with all assessments of banks’ health, much depends on the underlying assumptions behind the analysis.”
The EBA told lenders last year in what it described as a capital-raising exercise to hold on to more than 200 billion euros in profits and investments accumulated to pave the way for tougher global standards, known as Basel III, and in response to concerns about the quality of their European sovereign bond portfolios.
“Concerns remain on asset quality and forbearance, which need to be addressed,” Andrea Enria, chairman of the EBA, said in the statement. “This is also a necessary precondition for the credibility of the next EU-wide stress test.”
The ECB is set to take on supervisory powers next year over all euro-area banks after legislation underpinning the system was endorsed by member states. The EBA said it is seeking “alignment in methodologies and timeline” with the ECB’s assessment.
“I must admit to a degree of cynicism in the delay,” Philip Keevil, a partner at New York-based Compass Advisers Group LLC, said in an e-mailed statement. “I would be concerned that ’alignment’ means lower standards. I’m not sure that this does anything for confidence in the banking system, which desperately needs fixing.”
The establishment of ECB supervision is a prerequisite for banks to receive direct aid from the European Stability Mechanism, the euro area’s bailout fund.
“When the ECB takes over EU bank supervision, it will get what in the U.S. we call a pig in a poke,” Karen Shaw Petrou, managing partner of Washington-based Federal Financial Analytics Inc., said in an e-mailed statement.
“Banks are finally making some progress improving their capital, but asset quality is essentially a mystery at most EU banks, where rules treat sovereigns as flawless and borrowers as perfect up to the moment of default,” Petrou said.
Financial ministers last month overcame German concerns about the supervisor plan by committing to “work constructively” on any proposals to amend the bloc’s treaties. German Finance Minister Wolfgang Schaeuble has said that the EU’s current rulebook has hampered the design of the ECB’s supervision arm, including in terms of separating oversight decisions from monetary policy.
The draft law stipulates that the ECB must carry out a “comprehensive assessment, including a balance-sheet assessment,” of any banks that it intends to directly supervise.
“We want to know what kinds of banks we supervise,” Joerg Asmussen, a member of the ECB executive board, told reporters on May 14. The review of balance sheets “will be done by the ECB together with national supervisors” and “it should be finished before the single supervisory mechanism starts,” Asmussen said.