EU banks should factor potential fines into stress tests - EBA chairman

Wednesday 04 June 2014 17.31
EBA chairman Andrea Enria mounting fines had become a concern for regulators
EBA chairman Andrea Enria mounting fines had become a concern for regulators

European Union banks should factor in potential fines for past misdeeds when they take part in a regulatory assessment of their financial strength, the European Banking Authority’s chairman has said.

Banks have paid about $6 billion in settlements for rigging interest rate benchmarks and a global probe is underway into possible similar manipulation of currency benchmarks.

French bank BNP Paribas, which is part of this year's so-called "stress test" of EU banks, could also be facing a fine of up to $10 billion in the United States for possible breach of US sanctions.

The EBA is responsible for coordinating the health check of top banks to see if they can withstand severe theoretical market stresses unaided by taxpayers.

EBA chairman Andrea Enria said the mounting fines faced by some lenders had become a concern generally for regulators, and should be factored into this year's stress test.

"The point of conduct risks, and of the impact of these fines and penalties ... on a bank's capital position, is a concern," Mr Enria told Reuters.

"In terms of factoring it into the stress test, that is of course very complex," he added.

If a bank or its regulator knows there is the likelihood of a fine hitting capital then "these types of capital hits should be factored into the picture and taken into account in the stress test," Mr Enria said.

"We rely on all the parties involved to make sure the result of the stress tests are reliable."

Another regulatory source said central bankers and supervisors across the EU were looking at whether a more formal framework was needed to ensure banks make proper provisions for possible fines.

Part of the concern is the unpredictability of fines imposed by US regulators and what is seen from Europe as rivalry between American regulators who want to be seen as the toughest.

Currently a supervisor can force a bank to increase the amount of capital it holds in its so-called discretionary or Pillar II buffer, which is separate from a lender's core, mandatory cushion.

Having a more formal capital charge to cover likely fines was one option, but the source said discussions were still at an early stage.