Europe Risks ‘Disaster’ Without Bank Resolution, Sijbrand Says

The Dutch central bank said Europe must agree on a common mechanism to resolve failed banks or risk discrediting a European Central Bank review of their assets.

Europe’s leaders should ensure sufficient financial safeguards are in place for any recapitalization of the lenders, Jan Sijbrand, director for banking supervision, said at a news conference in Amsterdam today.

“A situation where regulation is happening in Frankfurt but the repair or the recovery of a bank takes place in the 18 countries of the euro, will not go well for long,” he said. “That is a recipe for disaster.”

The proposed resolution authority, along with European Central Bank oversight of euro-area lenders, form the core of a banking union that is intended to sever the link between bank and sovereign debt. While European policy makers agree on the need for a banking union after the crisis that began in Greece four years ago, they are divided on the means to move forward.

Dutch banks ING Groep NV, ABN Amro Group NV, Rabobank Groep and SNS Reaal NV were among firms attending meetings on the asset review with ECB officials in Frankfurt today. Lenders from Italy, Latvia, Portugal, Slovenia, Slovakia and Austria were also present. The ECB has discussed its plans in three rounds of closed-door briefings with bank executives this month.

The ECB has clashed with Germany over how much to centralize the handling of failing lenders. It has called for the planned Single Resolution Mechanism to be based around a “strong and independent” authority with a central fund, while Germany has pushed to limit centralized powers and joint failed-bank financing.

Property Assets

There’s still debate over how to handle shortcomings in asset quality ahead of the publication of the ECB’s review, Sijbrand said.

“This is something that needs to be watched in the course of next year to avoid an uncontrolled process,” he said. “There can only be one round of capital raising after both reviews have been completed.”

The Dutch central bank would be surprised if the ECB found new issues with real estate assets in the Netherlands, some of which turned sour after the financial crisis, Sijbrand said.

Politicians and regulators have entrusted the European Central Bank with overseeing the region’s financial system to prevent a repeat of the turmoil that set off the euro area’s worst recession since World War II. The ECB is conducting a three-stage asset review, which it’s running as a condition for taking over supervision of the industry in 12 months time.

ING and ABN Amro have said they are confident about passing the assessments after restructuring and adding to capital buffers since the outbreak of the financial crisis five years ago.

The asset reviews will conclude next October. Officials will execute a preliminary assessment of risk early in 2014 to identify assets needing further examination, then conduct a full review of balance sheets. The European Banking Association will then help with stress tests and an assessment of banks’ sovereign debt holdings.

“The operational challenge may be the biggest in this review,” ING Chief Risk Officer Wilfred Nagel said this month, referring to the data banks have to submit for the reviews. “We are not so much concerned on the outcome.”

The ECB has identified about 130 banks that may be subject to the balance-sheet exam, based on data for the end of 2012. The final list will be compiled in 2014. National regulators will run the exercise for each country, on the basis of centrally developed data requirements and methodology.

ABN Upbeat

State-owned bank ABN Amro doesn’t expect it will have to go to the government for additional capital after the ECB review, Chairman Gerrit Zalm told lawmakers last month. There’s a considerable margin between the bank’s current core Tier 1 ratio of 13 percent and the regulator’s threshold of 8 percent of capital to assets, he said.

Banks in the Netherlands had an average core Tier 1 ratio, a measure of financial strength attaching varying risk weights to different assets, of 11.5 percent taking into account Basel III regulatory requirements that will apply in 2019. That compared to 9.5 percent in 2010, according to Dutch central bank data.

At the end of the assessment, the ECB will publish aggregate data at country and bank level, together with any recommendations for supervisory measures. The evaluation will be published before the ECB assumes its supervisory role next November, it said.

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