by KG/XINHUA The European Central Bank (ECB) hopes the announcement on Sunday that 25 out of 130 banks had failed its comprehensive assessment will help establish its credentials as the new supervisor of the most systemically important banks in the eurozone. However, the relatively small size of the capital shortfall of 25 billion euros (about 31.73 billion U.S. dollars), plus the fact that no German or French still need to raise capital quickly led to some comments that the ECB could have taken a tougher line. "It is a balancing act, but they definitely came down on the side of keeping the credit channels open, and there is a risk that there may be question marks in the market," say Geoff Dawes, Head of Banks Equity Research at Societe Generale in London. The way in which the ECB, together with the European Banking Authority, organised the balance sheet review and stress tests, meant that the banks had plenty of time to fix their problems. During 2014, 12 of the 25 banks covered their capital shortfall by increasing their capital by a total of 15 billion euros. And amongst the other 13 that failed the tests, and need only another 10 billion euros in total, many are already well advanced with plans to strengthen their balance sheets. The biggest new capital requirement involves Banca Monte dei Paschi di Siena, which would currently fail the adverse stress test, based on a theoretical severe eurozone recession. It needs to find 2.1 billion euros in fresh capital. Among the 13 that must now submit plans to the ECB on how they will address their capital shortfalls, four were from Italy, two from Greece, and one from Cyprus. Some have quite small shortfalls to make up, such as Permanent TSB of Ireland which needs 854 million euros, and some have very small capital shortfalls of under 100 million euros. The generally modest size of the capital shortfalls makes analysts believe that there will be no big shock waves when the European equity markets open on Monday. The banks that failed have until Nov. 10 to come up with plans to meet the capital shortfall, either via restructurings, selling assets or raising fresh capital. They will then have nine months to implement their plans. In spite of some early criticism about not being tough enough, the ECB clearly hopes that the equity and credit markets will have increased confidence in eurozone banks, as the ECB takes over supervision under the Single Supervisory Mechanism from Nov. 4. Credibility is at the core of the issue. Back in 2011 the European Banking Authority conducted a set of stress tests, and was widely ridiculed when some banks which passed the test in July 2011 subsequently had to be rescued. Franco-Belgian bank Dexia was close to collapse and had to be broken up only a few months later in October 2011. And in May 2012 Bankia was subject to the biggest bank bailout ever seen in Spain. The ECB is anxious to avoid any similar embarassment. Daniele Nouy, Chair of the Supervisory Board, speaking on Sunday at an ECB press conference in Frankfurt, stressed that even the majority of banks that had passed the stress test would be subject to follow up measures, taking into account any weaknesses that the ECB has found in areas such as their accounting practices or loan loss provisioning. "We want to use the incredible amount of information that we have collected during the Asset Quality Review (AQR), and build on that," she said. During the AQR, around 119,000 real loan files were reviewed, as a sample of total bank balance sheets. Thus the accuracy of information given by banks to the regulators was checked. Following this review, the EBA then did a fairly extreme stress test based on a deep EU recession. The ECB sees trust in the banking system as a critical factor in allowing banks to raise funding, and thus sees the results of the AQR and stress tests as positive for the eurozone economy. "This unprecedented in-depth review of the largest bank's positions will help boost public confidence in the banking sector," Vitor Constancio, Vice President of the ECB, said at the press conference. "By identifying problems and risks, it will help repair balance sheets, and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth," said Constancio. However, there is still some scepticism among analysts as to whether the results of the comprehensive assessment (AQR plus stress tests) will help get credit flowing again, and the volume of lending also clearly depends on aggregate demand. It is however clear that many banks frontloaded their efforts for the AQR and stress tests, in order to publish better figures at the Dec. 31, 2013 balance sheet date. And others have made moves to repair their balance sheets during the time the AQR was going on, between January and September 2014. This may have involved raising fresh capital, but some banks may have also chosen to reduce the size of their balance sheets, and the ECB said from the start that it was aware that the attempts by banks to meet the requirements of the comprehensive assessment could potentially depress lending. Now that the results are in, some banks may feel comfortable making a higher volume of loans again.
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