ECB to begin bank stress tests under new role

The European Central Bank said Wednesday it will start next month to check the balance sheets of 124 eurozone banks and "stress-test" them before it becomes the sector`s supervisor next year.

Brussels: The European Central Bank said Wednesday it will start next month to check the balance sheets of 124 eurozone banks and "stress-test" them before it becomes the sector`s supervisor next year.

The exhaustive year-long review will seek to sniff out risky loans and assets, insufficient capital and other dangers that would make banks more vulnerable to financial shocks.

ECB president Mario Draghi called the project "an important step forward for Europe and for the future of the euro area economy".

"Transparency will be its primary objective," he said in a statement.

"We expect that this assessment will strengthen private sector confidence in the soundness of euro area banks and in the quality of their balance sheets."

The list of banks accounts for 85 percent of the eurozone banking system and includes Deutsche Bank, BNP Paribas, UBS, ABN AMRO, Banco Santander and the Bank of Cyprus.

The "comprehensive assessment" will look at "key risks", review the quality of bank assets and include "a stress test to examine the resilience of banks` balance sheets to stress scenarios", the ECB said.

Aside from building transparency and taking any necessary corrective actions, the exercise aims "to assure all stakeholders that banks are fundamentally sound and trustworthy".

The review starting in November will look at December 31, 2013 data and be carried out together with national authorities and supported by an external consulting firm.

To crisis-proof banks, the ECB will require them to set aside eight percent of capital as buffers against financial shocks.

Berenberg Bank senior economist Christian Schulz said "the exercise will increase transparency, trigger further balance sheet repair and restore confidence in the eurozone banking sector.

"A successful exercise could complete the process of healing after the Lehman and eurozone crises."

The ECB in late 2014 takes on the new role of single supervisor of banks in the eurozone, which will have 18 members from January when Latvia joins the currency bloc.

The single supervisory mechanism (SSM) is part of Europe`s banking union project, to be discussed further at a Brussels summit this week.

Germany`s Federal Financial Supervisory Authority (BaFin) praised the ECB`s review, which will cover 24 banks that make up 65 percent of the German banking sector.

"The assessment ensures that before the launch of ECB supervision there is transparency as to potential risks and burdens," said BaFin president Elke Koenig.

"Diligence is therefore again more important than speed."

Bundesbank deputy president Sabine Lautenschlaeger said the process "will be a tour de force for German banks and their supervisors" but added that "the effort will be worthwhile, as the SSM will give us the opportunity of getting the best out of all supervisory cultures in the euro area".

The eurozone has this year started to gradually emerge from its deep recession, which was sparked by a debt crisis made worse by huge bad property loans in Spain and other economies.

But for a sustained recovery to gain pace, banks would have to again boost lending at affordable rates to companies, small businesses and households, which they have been reluctant to do despite record-low ECB interest rates.

Berenberg Bank`s Schulz said "borrowing costs ... in the periphery remain much higher than in the core of the eurozone and the hope is that further restoration of the banking sector will encourage banks to take on more risks again and lend more at lower rates".

However, he warned that, while the banking union is meant to restore normal credit provisions, the lengthy ECB review "risks doing the opposite. Banks may stay away from any risky business even more to look as safe as possible for the new supervisor."