World Economy

ECB: Credibility Meets Compromise

ECB: Credibility Meets CompromiseECB: Credibility Meets Compromise

When Europe announced its latest health check of top banks early last year it promised a “comprehensive assessment” of how well prepared they were to withstand another financial crisis. In practice, a spirit of comprehensive compromise has been just as important.

A series of Reuters interviews with officials, bankers and others involved in the European Central Bank’s financial inspection of the Eurozone’s biggest banks shows that in the seven months since it began, the ECB has had to shoot down countless pleas from banks and national supervisors for special treatment.

At the same time, according to sources who spoke on condition of anonymity, supervisors have revised the way they value assets and banks have failed to provide all the data demanded – multiple compromises that could cumulatively threaten the tests’ reputation as tough and consistent.

The ECB, which takes over as supervisor for the region’s top banks on Nov. 4, declined to comment in detail on the issues raised but insisted the exercise was robust and thorough.

It will announce on Oct. 26 which of Europe’s 130 biggest banks have valued their assets properly and which have not, as well as whether banks need more capital to withstand another economic crash. Anticipation of the results is already affecting bank shares, with Italy’s Monte dei Paschi falling to an all time low last week amid fears it would be forced to raise more cash.

 Health Check

“This health unprecedented in terms of scale, rigor, severity and transparency,” a spokeswoman said. “It provides in-depth information on the condition of the largest banks in 19 countries and aims to strengthen banks’ balance sheets by identifying problems, build confidence and enhance investors’ trust.”

That said, one of the first compromises of the process came just two months into it, when the ECB privately acknowledged, according to sources with knowledge of the discussions, that there were “real dangers” of negative consequences if the banks were kept in the dark about how they were faring right up until the results were announced.

The auditors were then allowed, for the first time, to begin sharing information with the banks they were reviewing. “We would take a file with the largest (loan loss) provision movement (and)... told them why we were uncomfortable with provisioning that area,” said one source familiar with the meetings.

The banks could then work out the maximum adjustment to provisions they were likely to face, the source said - a key clue to the ECB’s final assessment of whether they would have to raise more capital or rein in dividends.

“You knew what the major drivers were,” confirmed one senior banker who attended meetings for his company. “I don’t expect any surprises.”

As the exercise draws to a close, most believe that this time around, the results will deliver a convincing verdict on the health of Europe’s banks. “This is the fourth exercise and - I hope - the last,” said one official.