ECB details plan for results of bank stress tests

Thursday 17 July 2014 09.18
Banks will have just two weeks to come up with plans to fix any capital shortfalls
Banks will have just two weeks to come up with plans to fix any capital shortfalls

The European Central Bank has laid out plans to publish a trove of data on individual banks - ranging from measures of their leverage to a standard level of non-performing loans - when it completes a landmark review.

The central bank also said it would give lenders just two weeks to come up with plans to deal with capital shortfalls.

The ECB is reviewing the asset valuations of the euro zone's 128 most important lenders and assessing their ability to withstand future crises. 

The results will be published in the second half of October, before the ECB takes on bank supervision on 4 November.

"The ECB has been very transparent in engaging with banks and aims to provide as many details as possible to markets and other participants on progress in the comprehensive assessment and what the end of the process will look like," said Danile Nouy, chair of the ECB's supervisory board.

As well as publishing a template of the six pages of data it will give per bank, the ECB detailed milestones between now and the end of the tests, including plans to give banks "partial and preliminary" results in "September/October" while withholding the final results until "very close" to publication.

As reported earlier this month, the disclosure template includes the 'leverage ratio', a blunt measure of banks' total assets to equity that lenders are not yet required to disclose.

Along with the headline results of capital ratios, the ECB will also make extensive disclosures about banks' portfolios, including details of the areas where regulators made the largest adjustments to banks' asset valuations.

Standardised ratios for non-performing loans as a percentage of outstanding loans will be given for the first time, along with standardised figures on the level of loan-loss provisions they have taken relative to their bad loans.

This will allow analysts and investors to make more meaningful comparisons between the state of banks' loan books, something they have complained about being unable to do in the past.

Giving investors the tools to make more informed decisions about European banks is a key objective of the tests since European bank valuations have trailed their US peers over the financial crisis.

The results will be based on banks' positions at the end of 2013, but details will be given of any funds raised in the capital markets between 1 January and 30 September. 

Banks with capital shortfalls will have to present plans to tackle them within two weeks.

The ECB said its "general expectation" was that banks would use the purest form of equity capital to cover shortfalls revealed by the asset review and the 'baseline', or most likely economic, scenarios.

This implies banks cannot use asset sales as a way of remedying shortfalls, although the banks with shortfalls based solely on the asset quality review can offset this with earnings from 2014.

Banks who fail based on the adverse scenario, which models negative developments in everything from house prices to economic growth and inflation, will be allowed to make "limited use" of other kinds of higher quality capital including some types of bonds that convert to equity.

Other milestones over the next three months include the publication, in early August, of the methodology that it will 'join up' the results of the asset valuation review and a forwarding looking stress test on how well positioned banks are to withstand future crises.