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Constancio Says European Banks Undervalued, FT Reports

European Central Bank Vice President Vitor Constancio said investors have yet to price in that European banks are as strong as U.S. lenders in terms of their capital levels, the Financial Times reported.

“The situation of the European banks is better than market perceptions,” Constancio said in an interview, according to the FT. “If you take the largest European and American banks, you find that the median common equity Tier 1 capital of European banks is slightly above the median of U.S. banks.”

The ECB will start supervising European lenders next year in a step toward a banking union that is designed to sever the link between banks and sovereigns. It is due to conduct a risk review before analyzing banks’ balance sheets and conducting stress tests in collaboration with the London-based European Banking Authority.

Constancio said the scope of the asset review would be tailored to individual banks’ risk profiles, business models and home countries, and will harmonize diverging definitions of non-performing loans, according to the FT. ECB Executive Board member Yves Mersch said in August that the risk assessment will form the basis for picking the assets that will be scrutinized for each bank.

“Of course we will define priorities according to the known situations in each country,” Constancio told the FT. “In some places, real estate poses potentially more problems than other asset classes. In other countries it’s shipping loans and we will take that into consideration in the size and depth of the sampling in our exercise.”

The ECB will publish banks’ capital positions, including possible shortfalls, after the asset review and the stress test and before it formally starts supervision, Constancio said. By that time, the European Stability Mechanism may become a backstop vehicle for re-capitalizing banks that can’t tap the market for funds, he said, according to the FT.

The exercise will result in a “scoring” system for banks’ financial health modeled on a similar U.S. formula, Constancio said.

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