Europe's banks face moment of truth from ECB review
Frankfurt (Oct 23) At around noon on Thursday, the euro zone's 130 biggest banks will receive the European Central Bank's final verdict on their finances after a review aimed at drawing a line under persistent doubts about the health of the region's banking sector.
Most banks already have a good idea of how they have fared in the region's most comprehensive ever bank tests, after getting "partial and preliminary" results from the ECB in recent weeks. But the final numbers were only agreed by senior regulators and supervisors late on Wednesday.
They will not be made public until 1100 GMT on Sunday, and the ECB has asked banks not to make any disclosures until this point. The results will end months of uncertainty on what measures they will be forced to take to prove they can weather another economic crash.
Markets are expecting few surprises, and there have already been some reports of how banks have fared including a Tuesday report in Spanish newswire Efe which named 11 banks as having failed and briefly moved the euro.
The ECB's assessment, which is designed to allow the central bank to take over with a clean sheet when it becomes the euro zone's banking supervisor on Nov. 4, is based on the banks' financial positions at the end of 2013.
The banks have strengthened their balance sheets by almost 203 billion euros ($257 billion) since mid 2013, the ECB says, which implies that several banks which failed are likely to have already raised cash to deal with any shortfall.
Nonetheless, the outcome of the tests will be closely watched.
"This is the one chance that the ECB gets to once and for all step out of the shadow of all the national regulators and really claim its own independence," said Jacob Funk Kirkegaard, a senior fellow at the Peterson Institute in Washington D.C.
Over the past year, more than 6,000 experts combed through the euro zone's 130 largest banks' books - including household names like Deutsche Bank, Santander and BNP Paribas and national champions like Bank of Cyprus and Bank of Ireland - to unearth any hidden losses and weaknesses.
As well as setting the ECB up for its new role as supervisor, the tests were also designed to remove investors' lingering doubts about euro zone banks, which continue to trade at a discount to banks in the United States. (GRAPHIC: link.reuters.com/buf36v)
Analysts say the results could pave the way for U.S. investors, who are holding historically low levels of European bank equity, to pile back in since the banks' finances will have the seal of approval from a supranational body.
Emil Petrov, head of capital market solutions at Nomura, said the announcement of results would be positive for banks over the longer term, since they will remove a major source of uncertainty and pave the way for the lenders to resume issuing junior bonds.
"There are other factors at play here and, at the moment these are not positive: growth fears, geopolitical conflicts etc," he said. "The immediate market reaction to the stress test results will be equally driven by the macroeconomic backdrop. Longer term, the effect ought to be positive."
The ECB has repeatedly stressed the thoroughness of its review, which included a forensic assessment of whether banks had properly valued their assets and a stress test to see if they had enough capital to withstand another crash.
Officials privately guide that the process - which was far more intensive than three previous EU-wide bank tests - is at least as important as the actual outcome.
Kirkegaard said the ECB had done a "competent job" so far, but now it was crucial for the credibility of the tests that the ECB also acted upon the information it gathered – free of political, industry or national influence.
"It may sound somewhat simplistic to say 'look, we got to have blood on the floor', but there is a lot of symbolism involved in this," Kirkegaard said.
Market estimates of how many banks will fail the tests, and who those failures will be, are diverse, but generally investors are expecting few failures and surprises, especially amongst household names.
JP Morgan said it was less likely that a major bank failed the test, but some second-tier lenders may have missed the mark.
"That would be a credible outcome," said Roberto Henriques, European credit analyst at JP Morgan. "You show that you are strict and some banks fail, but guess what, these are technical failures and the banks have already dealt with their problems."
Technical failures would be those banks that missed the capital requirements as of end-2013, but which have since raised sufficient capital to meet the ECB's mark.
German cooperative mortgage lender Muenchener Hypothekenbank, for example, has already said it did not meet the capital requirement, but raised 400 million euros in July to make up for it. Austria's part-nationalized lender Volksbanken AG has already said it would wind itself down to avoid a looming capital crunch that it was struggling to plug.
If banks that have raised money this year need more, market sources say they could raise it. "If you look at Monte Paschi and the Greek banks, they've all raised a lot of equity this year and attracted a lot of interest,” a London-based fund manager said on Tuesday.
"If they now need to top up by 1 or 2 billion each, which is probably a bear (worst) case, the market will give them that money ... And you haven't got much choice, quite frankly, if the alternative is to be wiped out."