ECB Asset-Quality Review to Restore Confidence, Knot Says

A credible and firm asset-quality review of euro-area lenders will restore confidence in the European banking sector, including the Netherlands, Dutch Central Bank President Klaas Knot said.

“The upcoming European Asset-Quality Review, if executed well, will help restore the balance sheets of Dutch banks,” Klaas Knot, who also sits on the European Central Bank’s governing council, said at a press conference in Amsterdam today before the publication of its semi-annual financial stability report. “Growing confidence strengthens the possibility to raise additional capital.”

The European Central Bank is slated to take over supervision of all euro-area banks next year, after a transition period in which the ECB will assess the quality of banks’ assets and their resilience to shocks. Euro-area nations now are debating what kind of financing options need to be in place to head off contagion from capital shortfalls that are uncovered.

The European Union’s financial-services chief, Michel Barnier, has proposed a Single Resolution Mechanism that would have a central fund handle the costs of failing banks and give decision-making authority on resolution decisions to the Brussels-based European Commission. Germany has led objections to the proposed fund and also the commission’s proposed powers.

Public Backstop

The bank reviews are the final opportunity to restore confidence in the region’s financial system, ECB Executive Board member Joerg Asmussen said last month. Europe’s lenders have undergone two stress tests since 2010, with eight banks failing the last round conducted by the European Banking Authority in 2011 with a combined capital shortfall of 2.5 billion euros ($3.4 billion). Belgium’s Dexia SA was among banks that passed only to be wound down.

“As part of the balance sheet assessment a public backstop is necessary,” Knot said. “Only as a last resort and under firm conditions, in line with the European propositions for a bail-in.”

Knot also said countries should show more explicitly where the backstop comes from and the size of the financial means governments have reserved for their banks.

Former ING Groep NV Chief Executive Officer Jan Hommen, who stepped down from his post Oct. 1, questioned how banks will raise capital should they fail a continent-wide stress test. “The question for me is: who is going to provide that capital,” Hommen said in a Sept. 20 interview.

Dutch Economy

While Dutch banks are on their way to meet Basel III capital requirements, risks remain because of the country’s weak economic recovery, Knot said.

“Rising unemployment and a growing number of bankruptcies lead to more credit risks for Dutch banks and higher provisions for future losses pressure profitability,” it said. In 2012, the core capital ratio of Dutch banks increased to 11.5 percent from 9.5 percent a year earlier, according to the report.

The pace of economic contraction in the Netherlands, which is in its third recession in five years, is slowing. Gross domestic product fell 0.1 percent in the second quarter after declining 0.4 percent in the three months through March.

“I’m reasonably optimistic about the Dutch economy,” Knot said today. “I expect the economy to be out of the recession in the third quarter.”

The government’s planning agency CPB predicts the economy will contract 1.25 percent this year and grow 0.5 percent in

2014. Economists expect the Dutch economy to expand 0.1 percent each in the third and the fourth quarter, according to Bloomberg’s most recent survey. For the year, they forecast a 1 percent contraction, followed by 0.6 percent growth in 2014.

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