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ECB Defends Stress Test From Erste’s Criticism of Design

Andreas Treichl, CEO, Erste Group Bank AG
Andreas Treichl is the CEO and Chairman of the Management Board of Erste Group Bank AG. He is pictured here in an undated photograph, provided to the media on the Bank's website in Dec., 2012. (Source: Erste Group Bank AG via Bloomberg News)

The European Central Bank defended the design of a stress test for 128 euro-area lenders, after Andreas Treichl, head of Erste Group Bank AG, vowed to fight its “political” bias against eastern Europe.

The ECB said the stress test “reflects a narrative which consistently portrays the main prevailing financial stability risks identified” by the European Systemic Risk Board, which proposed the adverse scenario, according to an internal ECB document obtained by Bloomberg News.

Treichl said on May 21 that the stress test favors banks in Italy and other southern nations over those in healthier economies in eastern Europe, where Erste has a strong presence. Austria’s biggest lender will try to “fix” the exam, which has been skewed by a “dramatic political intervention,” he said.

The exam conducted by the ECB in cooperation with the European Banking Authority will test how well banks can withstand an economic crisis that is the bleakest scenario ever simulated by European regulators. The adverse scenario assumes that the Czech economy will miss the European Commission’s growth forecasts by a cumulative 10.1 percentage points over the three years through 2016, while Italy is seen underperforming by 6.1 points.

“Why is the southern European region much less affected than the Czech Republic or Croatia?” Treichl said.

‘Country-Specific Shocks’

In the document, prepared for a press briefing in Frankfurt on May 27, the ECB said: “Cross-country heterogeneity reflects both differing structural responses to common shocks and, to some extent, the impact of country-specific shocks.” An ECB spokeswoman declined to comment.

The document also addressed media reports that Dexia SA was exempted from the stress test’s adverse scenario. Banque de France Governor Christian Noyer said yesterday that Dexia is a “unique case” because it’s being wound down, and “the stress tests that use extreme scenarios, because of the state guarantees, don’t make sense” when applied to it.

The ECB pointed to a footnote in its October 2013 statement on the Comprehensive Assessment, which states that the “assessment methodology for this group will duly take into account its specific situation.”

After receiving two bailouts from French and Belgian taxpayers in the space of five years, Dexia got authorization for an orderly resolution from the European Union in December 2012. The ECB still included Dexia in the assessment it’s conducting before it assumes full oversight of euro-area banks in November.

‘Material Findings’

The ECB also states in the document that any “material findings” during the assessment “that need to be addressed immediately” will be the responsibility of national supervisors, which remain in charge until November.

“In the event that a severe weakness arises before October 2014, then corrective measures will need to be imposed by the national supervisors, liaising with the ECB, as they are still the competent authority during this period,” according to the document.

Sabine Lautenschlaeger, vice-chair of the ECB’s Supervisory Board, used a May 23 meeting with Spanish bank executives to tell them who would be inspecting their lenders as oversight duties move to Frankfurt.

Lautenschlaeger also said the ECB would maintain close cooperation with national regulators so that their knowledge and experience isn’t lost, said two people briefed on the meeting at the Bank of Spain.

Capital Planning

The ECB has communicated its expectations to banks on capital planning after the outcome of the Comprehensive Assessment, according to the document.

“We are closely watching how banks are progressing” with the assessment, the ECB said. Lenders send bi-weekly updates to their national supervisors, which forward them to the ECB.

“We cannot let delays risk progression of the entire process,” the ECB said. “We are rigid when it comes to delays. We will make it very clear to the banks that where crucial information cannot be supplied we may apply conservative valuations.”

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