Banks May Need Capital Backstops for Stress Test, Enria Says

European banks may need to raise capital after combined stress tests and asset quality reviews from the European Banking Authority and European Central Bank next year, Andrea Enria, the EBA chairman said.

The EBA’s stress test and ECB’s asset quality review will “run in the same time,” Enria told lawmakers in Brussels today, with the two institutions preparing a “single outcome” for each bank.

“There is a very very strong capital buffer already there to absorb losses,” he said. “But still there could be cases where banks need to strengthen their capital.

As the ECB prepares to take over supervision of all euro-area lenders in 2014, it will begin a three-phased analysis of the institutions coming under its umbrella. As laid out by Executive Board member Yves Mersch in August, the central bank will start with a risk review before analyzing banks’ balance sheets and conducting stress tests in collaboration with the London-based EBA.

The Single Supervisory Mechanism is a step toward a planned European banking union that is supposed to sever the link between banks and sovereign debt.

The quality of next year’s European bank stress tests depends on how well the European Central Bank carries out its review of lenders’ balance sheets, Enria said responding to questions from lawmakers in the European Parliament today.

‘‘The stress test results could be only as good as the asset quality review which is backing these results,” Enria said. “And if there is not a serious assessment of banks” then the stress test “cannot be reliable,” he said.

Michel Barnier, the EU’s financial services chief, put forward plans earlier this year to centralize crisis management of banks in the euro area, including through setting up a common 55 billion euro ($74.5 billion) fund, financed by levies on banks. Nations are also working on the details for how the euro area’s bailout fund for governments, the European Stability Mechanism, can directly lend to banks.

Enria, previously head of the supervisory regulations and policies department at the Bank of Italy, said he’s “still dreaming of the moment when we will have a European backstop in place.”

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