Europe banks face moment of truth after ECB review

Europe: The euro zone’s 130 banks received the European Central Bank’s (ECB) final verdict on their finances yesterday after a review aimed at drawing a line under persistent doubts about the health of the region’s banking sector.

Most lenders already had a good idea of how they had fared in the region’s most comprehensive-ever bank tests before the results landed around noon, after getting “partial and preliminary” figures 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 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.

Investor doubt

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 US.

Analysts say the results could pave the way for US investors, who are holding historically low levels of European bank equity, to pile back in since the banks’ finances would 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 is at least as important as the actual outcome.