European Central Bank President Mario Draghi said officials won’t hesitate to fail banks in its stress test next year as the ECB sets out to prove its vigilance in its new role of banking supervisor.
“Banks do need to fail” to prove the credibility of the exercise, Draghi said in a Bloomberg Television interview with Francine Lacqua in Frankfurt, after the ECB published plans for its bank-asset check. “If they do have to fail, they have to fail. There’s no question about that.”
The ECB is running a three-stage probe into the health of the euro-area banking industry as a precondition for taking over supervision next year, and it set a benchmark capital-to-assets requirement of 8 percent today. A series of stress tests, which pit the banks’ balance sheets against a range of adverse scenarios, will be conducted with the European Banking Authority as the final step.
“The test is credible because the ultimate purpose of it is to restore or strengthen private sector confidence in the soundness of the banks, in the quality of their balance sheets,” Draghi said. “Ultimately that’s the objective, to have private-sector money to be put into the banking industry.”
ECB Executive Board member Joerg Asmussen said this month that “this is our third and last chance to restore confidence” after two previous stress tests by the EBA failed to do so.
The euro declined after Draghi’s comments and traded at $1.3769 at 4:14 p.m. in Frankfurt. The Stoxx 600 financial services index fell more than 0.7 percent percent today to 325.09.
Draghi said he’s sure that the region’s governments will be ready to fill any capital holes that emerge as a result of the stress tests.
Banks in Spain, Italy and Portugal face about 250 billion euros ($345 billion) in potential losses on their business loans over the next two years, the IMF said in a report earlier this month. That equates to about one-third of the total capital held by the banks in those three countries.
“I have no doubt whatsoever that backstops will be there - - which doesn’t mean that they will have to be used because first and foremost it’s private money that needs to be used,” Draghi said. “There’s an explicit commitment to have in place proper, adequate national backstops by the time the exercise is being carried out.”
Releasing details of its asset review of around 130 banks earlier, the ECB said it hasn’t yet decided on details of the stress tests, while emphasizing that having capital present if needed is “critical.”
At the end of the assessment in October 2014, the ECB will publish aggregate data at country and bank level, together with any recommendations for supervisory measures, the institution said. Draghi said the process of healing the banking sector has already started.
“In many member countries, supervisors are actually undertaking a very convincing action of increasing provisions, asking banks to proceed with recapitalization,” he said. “A substantial amount of private capital has been raised so we’re not starting from scratch but certainly, it’s the beginning of a new way of doing things.”