- Title: EU-BANKS Europe's banks face moment of truth from ECB review
- Date: 24th October 2014
- Summary: (FILE) UNKNOWN LOCATION (REUTERS) ANIMATION OF BANK ON WEIGHING SCALES
- Embargoed: 8th November 2014 12:00
- Keywords:
- Topics: General
- Reuters ID: LVA6UKYEFOHHLHHK8ZLSABKN190E
- Story Text: The European Central Bank (ECB) will make public its final verdict on the finances of Europe's 130 biggest banks at 1100 GMT on Sunday (October 26), after a review aimed at drawing a line under persistent doubts about the health of the region's banking sector.
The banks themselves received the results on Thursday (October 23), but the ECB asked them not to make any disclosures until the public announcement. The results will end months of uncertainty on what measures banks 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 November 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 watched closely.
"The markets which are going to be most affected, certainly in the short term, are likely to be Italy, Spain, possibly Portugal, and Austria. Interestingly enough, there may also be some German banks," predicted David Ereira, partner in Linklaters law firm.
Over the past year, more than 6,000 experts combed through the books of 130 largest banks in the euro zone - including household names like Deutsche Bank, Santander and BNP Paribas - to unearth any hidden losses and weaknesses.
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.
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.
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.
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.
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-nationalised lender Volksbanken AG has already said it would wind itself down to avoid a looming capital crunch that it was struggling to plug.
Chris Beauchamp, a market analyst at IG online trading firm, said the major banks should benefit from a successful result.
"So if you get a decent set of results for things like ING, Credit Agricole, even BNP Paribas, you could see those banks begin to bounce back sharply as hedge funds close their short positions," he said.
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.
Ereira said the overall testing process and results may affect business strategy at the major banks.
"One of the things that I think will come out of the current process, and going forward, is a greater degree of consolidation, a greater degree of specialisation as people identify the markets that they should be in, need to be in and can succeed in," he said.
Jan Pieter Krahnen, Professor of Finance at Frankfurt University, said that the testing process had already helped to strengthen Europe's financial system.
"So the most important message, or the most important result, of Sunday's statement has already been materialised. Namely, in the run-up to Sunday's announcement, many institutions in Europe have increased their capital base, have reduced their risk-weighted capital, and thereby contributed to a more resilient financial system."
Investors will be keeping a close eye on the markets when they re-open on Monday morning after the results.
On Friday (October 24), the European banking index rose 0.3 percent, boosted by hopes that the ECB's review should not reveal too many problems. Banca Monte dei Paschi di Siena shares surged 8 percent as traders said the bailed-out Italian lender could pass the health checks relatively unscathed.
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