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 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.
IMPACT
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: http://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."
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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.
MISSED MARK
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."
(Editing by Pravin Char)
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