Europe’s Banks Fret About Stress
The European Central Bank on Wednesday will host a public hearing at its Frankfurt headquarters on the draft framework regulation for its new euro-zone banking supervisor. The framework will set out how the ECB will cooperate with national authorities within the new supervisor, which starts in November. But most of the chatter is likely to be about what happens before that.
By Christopher Lawton
The European Central Bank on Wednesday will host a public hearing at its Frankfurt headquarters on the draft framework regulation for its new euro-zone banking supervisor.
The framework will set out how the ECB will cooperate with national authorities within the new supervisor, which starts in November. But most of the chatter is likely to be about what happens before that.
Before the supervisor can open its doors in November, the ECB must conduct a review of bank assets in the euro zone followed by a stress test. The exercise is Europe’s best chance to erase any lingering doubts over the strength of its banking system, officials say, but banking associations are clamoring for their voices to be heard before the ECB publishes the results.
“I suspect the bulk of the conversation on Wednesday will be around the asset quality review and the stress test, because it’s staring these guys in the face at the moment,” says Simon Hills, executive director of prudential capital and risk for the British Bankers’ Association, whose members such as HSBC and Royal Bank of Scotland have subsidiaries in the euro zone.
The ECB has promised to give banks their “right to be heard” when it comes to supervisory decisions it makes as the euro-zone’s top banking cop. The draft framework regulation provides detailed rules on the use of evidence, witnesses and experts as part of a “supervisory procedure,” before the ECB adopts a decision that affects a bank’s rights. Banks also can appeal to the Court of Justice of the European Union.
“In its action, the ECB should comply with the principles of due process and transparency,” the draft framework regulation says. The final version of the framework regulation will be published in May.
But it’s not entirely clear what the right to be heard for each institution means, especially when you set it against the tight timetable that the ECB is operating under to start the supervisor by November, says Robert Priester, deputy chief executive of the European Banking Federation in Belgium, which bills itself as the “united voice of banks established in Europe.”
Mr. Priester pointed to larger bank groups that operate across different parts of the EU. Regulators may miss a particular market’s details when dealing with banks at a group level, he says.
“Ideally you would want some kind of exchange of views between the bank and its supervisor and for the bank to have an opportunity to say we misunderstood what you wanted from us,” Mr. Priester says. “There seems to be relatively little leeway and space for that in the months ahead,” he added.
As important as it is for banks to tell their side of the story, BBA’s Mr. Hills fears there won’t be much time, especially as the templates for the asset quality review haven’t been released yet.
“Banks need to get their numbers right the first time when they submit their spreadsheets. There won’t be time to say ‘Oop,s we made a mistake,’” he says.
The ECB has said banks are responsible for collecting the necessary data, but national authorities are responsible for liaising with banks to ensure that the collected data are of the required quality. While the “liaising” is scheduled to start in mid-February, “the required templates have already been subject to two rounds of testing by the banks and the national competent authorities to ensure their optimization,” the ECB said in a detailed note on its comprehensive assessment released earlier this month.