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ECB Says Asset Review Results to Include 2014 Equity Action

Actions taken by euro-area banks to strengthen their capital position since last year will be included in the results of the European Central Bank’s asset review to be published in late October.

“This information provides an indication of those changes in the bank’s capital position over this period that are not reflected in the calculation of the potential capital shortfall, as at 31 December 2013, identified in the Comprehensive Assessment, but that have direct implications for its coverage,” the ECB said in an e-mailed statement today.

The ECB’s unprecedented review of 128 bank balance sheets is a prelude to the Frankfurt-based central bank becoming financial supervisor for the euro area in November. Since the data cut-off at the end of last year, banks including Deutsche Bank AG and Banca Monte dei Paschi di Siena SpA have raised equity during a period of relative market calm.

The final disclosure will show how banks’ capital ratios have been affected by the asset review, and how they fared in a stress test. If lenders fall below the capital thresholds set by the ECB, they’ll have between six and nine months to raise further equity, the ECB said.

Unprecedented Complexity

Lenders across the euro area have already submitted their own estimations of losses incurred in the hypothetical stress-test scenarios, the ECB said, adding that those assumptions will be checked in a process lasting until early September.

The stress-test data and the findings from the asset-quality review will be combined in what officials have referred to as a process of unprecedented complexity. The aim is to provide as rigorous a starting point as possible for the stress-test exercise, which simulates banks’ level of resistance to a severe economic downturn.

“All the findings of the AQR will be included in the stress test,” the ECB said in its release today. “In addition, wherever the findings for portfolios covered in the AQR show material differences with the banks’ own figures, parameters to forecast total losses in the stress test will be adjusted so as to reflect those differences.”

Litigation Costs

Results will also indicate other factors impacting bank capital since December including issuance of additional Tier 1 instruments, conversion of hybrid instruments into common equity capital, and “material” fines and litigation costs incurred.

European firms may have to set aside $50 billion, on top of the $80 billion already provisioned or paid, to cover litigation and settlement costs, according to a July 7 Morgan Stanley report. U.S. banks are better situated, according to analysts led by Huw van Steenis. They may need another $25 billion on top of the $125 billion they’ve provisioned or spent so far, they wrote.

Lenders won’t know the conclusive results before the day of publication, even though the central bank will discuss preliminary findings from September, the ECB said. The central bank aims to avoid triggering banks’ obligations to inform shareholders on any material changes to their balance sheets.

“Any findings communicated to the banks in the course of this process will be partial and preliminary in nature and, as such, not to be disclosed by banks,” the ECB said. “It is important to note that no bank will be given certainty concerning the full overall result on this occasion.”

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