The European Central Bank (ECB) has specified how it plans to scrutinize the more than 100 banks it must supervise beginning November 2014. It said unified tests were needed to identify hidden risks upfront.
The ECB announced Wednesday it will put to the test close to 130 big eurozone banks over the next 12 months in order to prepare for its role as centralized supervisor as of November 2014.
Among the institutions the central bank is to scrutinize in its asset quality review are 24 German lenders, including Deutsche Bank and Commerzbank. The ECB said the unified tests were to unearth hidden risks in the lenders' assets and to make sure the banks had an 8-percent core capital of their own.
The probes, which begin in November, are to help revive trust in Europe's battered banking sector by aligning countries' definitions of bad loans and the quality and risk-weighting of specific assets.
Bumpy road ahead
"Our main priority is more transparency," ECB President Mario Draghi said in a statement, mentioning that the results of the extensive tests would be published in October 2014.
Analysts said the review would be tough, because the ECB did not want to face surprises once it had taken charge of supervising procedures and because no one wanted to repeat the mistakes of two earlier EU-wide stress tests that simply failed to spot all important risks.
ECB banking supervision will be the first leg of a wider European banking union. The second stage will be to find cross-border agreement on how to salvage or wind down lenders that ran into trouble. The topic has been highly controversial as policy makers have been at loggerheads over whether or to what extent taxpayers should shoulder the costs for ailing banks.
hg/kms (Reuters, AFP)