The European Central Bank’s willingness to let lenders fail will depend on the funds available to wind them down, analysts said, after the new head of banking supervision said some should go out of business.
Daniele Nouy, chair of the supervisory board of the ECB’s regulatory arm, told the Financial Times it’s necessary to accept that some banks “have no future,” and authorities must “let some disappear in an orderly fashion and not try to merge them with other institutions.”
Her comments come as the ECB carries out a three-stage assessment of bank balance sheets, culminating in a stress test, before taking over as supervisor in November.
It has a “single opportunity” to establish its reputation and credibility, Ms Nouy said. The central bank may have to balance the desire to take a tough approach with the potential disruption that could occur from letting banks fail without a sufficient financial backstop in place.
“The market is concerned the limit to the toughness will be the amount of financial resources available to put into the sector and that will necessarily curb the potential outcomes,” Jon Peace, an analyst with Nomura Holdings said. “The jury’s still out as to how severe the test will be.”
An ECB spokesman declined to comment. The central bank published a transcript of the Nouy interview on its website.
The euro area’s political leaders are handing supervision of their biggest banks to the Frankfurt-based ECB to ease the sovereign debt crisis and win back the trust of investors. Global regulators are trying to work out how to allow banks to go bankrupt without causing economic turmoil.
“If there’s an interested party for buying these banks, or if there’s outside capital, that’s fine,” Neil Smith, a banking analyst at Bankhaus Lampe in Dusseldorf, said yesterday. “If there aren’t either of those, then the bank may well fail. It’s in the last instance that the bank fails.”
Backstops are in place for the ECB’s tests, allowing for a “very rigorous” review, ECB vice president Vitor Constancio told reporters last week. Banks found to have capital shortfalls can turn first to investors and then to public money, “which is available,” Mr Constancio said.
Some banks will probably fail the ECB’s tests this year, according to Luigi Odorici, CEO of Banca Popolare dell’Emilia Romagna SC.
“I hope the bar imposed by the ECB will not be too high just to show a ‘Teutonic approach’,” he said.