Banks set to pass ECB tests after loss provisions

The tens of billions of euro that eurozone banks set aside for loan losses in their latest annual accounts may have substantially reduced the chance of institutions failing ECB stress tests in the next few months.

A total of €71.5bn was set aside last year by the 20 biggest listed banks involved in the exercise, an analysis of their new annual reports shows. Many also boosted capital ratios by raising cash and hoarding profits.

If replicated across the 128 lenders subject to tests the ECB aims to complete by October, it could mean no bank will fail or be forced to raise large amounts of new capital. Such limited consequences helped discredit previous tests by the European Banking Authority — one reason the ECB is keen to show that its new exercise will truly be tough.

While some analysts have suggested that a failure by the ECB to force the closure of any eurozone bank could undermine the credibility of the exercise, many see it as more important the ECB’s scrutiny creates a stronger banking system, which the data suggests is happening.

“A lot of action has been taken,” said Carla Antunes da Silva, head of European banks research at Credit Suisse. “I don’t think you need to have a day of reckoning where a big bank needs to fail.

“A few years ago, if you had asked investors what they wanted to see from stress tests they would have said ‘bodies’ but not any more,” she added.

ECB president Mario Draghi has highlighted progress already made since they learned of his plans and said this month he was “pretty confident” that the testing regime would “find a stronger banking system than we had before announcing it”.

The EBA, which will coordinate this year’s stress tests with the ECB, said investors were interested not just in whether banks pass or fail but their sensitivity to stress and how supervisors deal with the results. “The credibility of the EU-wide stress test rests on transparency; market participants will determine for themselves how supervisors and banks are dealing with remaining pockets of vulnerability.”

In January, analysts at Keefe, Bruyette & Woods published a report showing 27 of the ECB’s 128 banks failing a simulated stress test, though, of these, only Commerzbank was among the top 20 listed entities. The German lender has said it is “well prepared” for the exercise.

One senior official at a banking regulatory body in Europe told Reuters he and his peers would not be concerned if the ECB review failed to force significant remedial action at major banks. However, several experts emphasised it could throw up surprises.

One person involved in tests before said large provisions already taken by banks do not mean they are out of the woods. One indicator was the ratio to equity of bad loans against which provisions have yet to be made.

- Reuters