FRANKFURT (Reuters) – After putting the eurozone’s top 130 banks through their paces, the European Central Bank will face a test of its own on Sunday – will its landmark health check succeed in convincing investors the region’s lenders are safe?
The ECB will announce the names of 25 banks that held too little capital at the end of last year, along with details of around 10 banks that have not yet made up the shortfall. The announcement is due at 1100 GMT.
As well as the number of failures, Reuters has already reported details of several banks’ performance, including that Germany’s Deutsche Bank and Greece’s Alpha Bank passed the tests while Ireland’s Permanent TSB failed.
Other media outlets have also reported how some banks and countries’ banking systems have fared.
With much of the news revealed in advance, the major remaining question is whether the exercise will be judged credible enough to banish lingering fears about eurozone banks, freeing them up to lend again and tempt US investors back to European banking shares.
The ECB has staked its reputation on delivering an independent assessment of the eurozone banks before it takes over as their supervisor on Nov 4.
The European Banking Authority (EBA), which will include the ECB results in an announcement of EU-wide stress test results at the same time on Sunday, is hoping its exercise will prove more convincing than previous rounds in 2009, 2010 and 2011.
The euro dipped on Friday amid uncertainty about the results, while euro area banking stocks were volatile as rumours swirled about who had passed and who had not. Initial comments from investors on Sunday and trading in banks on Monday will be the first real indication of how the tests are judged.
“At least we will get a true picture of what the banks have genuinely in their books,” said Alan Lemangnen, Europe economist at Natixis in Paris. “We see that the solvency of the European banking sector will improve and has already improved.”
Sources familiar with the tests say the ECB’s findings on whether banks have overvalued their assets, and what kind of corrective action it demands, will be at least as significant as who passes or fails.
A forensic review of how banks value their assets marks these health checks out from three previous EBA tests. While just 20 per cent of banks have failed the ECB tests, most lenders are expected to be found to have overvalued their assets.
If the ECB judges banks’ assets to be worth far less than the banks do, it will not force a bank to immediately take additional loan losses.