FRANKFURT (Reuters) — The European
Central Bank will reveal more detail on Monday on how it plans to go
about checking that top euro zone banks have the risks on their
balance sheets under control.
The ECB's asset quality review, or AQR, is part of a broader
examination that also includes a stress test to see how banks hold
up under shock scenarios, to avoid nasty surprises once the ECB
takes up responsibility for supervising them from November.
It aims to encourage banks to recognize losses on loans or
investments that have soured over time, allowing them to regain
investors' trust and free up capacity to grant new loans to help
along the euro zone's fragile economic recovery.
"The devil will be in the detail and the risks of lowest common
denominator and compromise in such a multilateral process are
legion," said Morgan Stanley's Huw van Steenis.
"This is why the market still has many doubts on how cathartic a
process the AQR and stress tests will be."
The ECB will address at least some of such doubts on Monday by
laying out, for example, how it will define when a loan has turned
bad and what the next steps will be.
On Friday, the European Banking Authority (EBA) set out key
parameters for the stress tests it coordinates, which imply that the
probe will be tougher than previous ones.
The two reviews will eventually feed into each other and their
timings will overlap somewhat, but the overall result -spelling out
the size of any capital shortfall — will only be published in
October.
Analysts have estimated the tests will show the banks need up to 100
billion euros of fresh capital.
WHAT'S NEXT
Over the past couple of months, the ECB has collected vast streams
of data from the 128 banks that are taking part in the exercise, and
a deadline for some lenders to deliver extensive detail on their
trading books and risk models is approaching.
National supervisors have also identified particularly risky
portfolios they would like included in the in-depth review, which
the ECB now needs to review and approve.
In Germany, for example, shipping is likely to be looked at closely.
The country was a global leader in ship lending before the financial
crisis struck and the global economic downturn crimped trade flows,
wiping out the profits that shippers need to pay off their loans.
Over the next couple of months, ECB inspectors will make sure the
lenders have set aside sufficient capital for possible loan losses,
check for data accuracy and run on-site reviews — the most complex
part of the assessment.
Banks and investors are keen to find out how the ECB will go about
this stage, which portfolios and assets will be looked at, and how
the ECB defines certain key criteria, such as when a loan has gone
bad.
Morgan Stanley sees Italy, the Netherlands and Austria in focus when
it comes to non-performing loans, arguing that in Italy these
continue to grow with no slowdown seen.
Italian lenders have been hard hit by writedowns on soured loans as
the country's deepest recession in 60 years takes its toll on
households and businesses.
Federico Ghizzoni, head of Italy's top lender UniCredit <CRDI.MI>
told Reuters TV last month the AQR would reveal that some smaller
Italian lenders need additional capital, and that it could also
trigger a new consolidation wave among them.
