The European Central Bank made one of its most forceful interventions to date in its stress tests for banks, after lenders took what it viewed as an unrealistic approach to assessing risks to their balance sheet.
(Bloomberg) — The European Central Bank made one of its most forceful interventions to date in its stress tests for banks, after lenders took what it viewed as an unrealistic approach to assessing risks to their balance sheet.
Banks, which are being asked in the tests to calculate the impact of specific economic scenarios, initially estimated their total capital ratio would decline by about 3.5 percentage points in a worst case, according to people familiar with the matter. The ECB subsequently adjusted the figure, leading to an impact of about 5 percentage points in the final results, the people said.Â
While it’s standard procedure for the ECB to challenge submissions by banks, the relative effect of this year’s so-called quality assurance phase is larger than in several previous tests, said the people, asking to remain anonymous discussing internal deliberations.
Bloomberg reported last month that the ECB had told banks that sailed through an early round of the test that the final results would be less rosy. The diverging views underscore the tensions between the ECB and the bankers it oversees, many of whom have chafed at what they regard as excessively intrusive oversight as they seek to lift share prices through higher payouts to investors.Â
The biennial exams give key insight into banks’ preparedness to weather shocks and feed into their capital requirements. A clean bill of health strengthens the case for distributing billions of euros to shareholders.Â
The latest test was billed as using the toughest economic scenario to date. Yet even after the ECB’s intervention, many lenders fared better than two years ago, thanks to increased profits and the positive effect of higher interest rates on lending revenue, said the people.Â
A spokesman for the ECB declined to comment as did a spokeswoman for the European Banking Authority, which coordinates the stress test. The results are scheduled to be published by the end of the month.
Unlike the US Federal Reserve, the ECB relies on banks to calculate how their balance sheets would be affected under the various stress test scenarios and it then reviews and challenges the results. While that means the ECB outsources much of the work, it also opens the door for banks to game the system if they want to maximize the capital they have available for payouts.
Andrea Enria, the ECB’s top bank oversight official, expressed frustration with the excessive optimism of certain banks, said the people. In a closed-door meeting of the ECB’s Supervisory Board this month, he called for work on how such unrealistic submissions can be discouraged, said the people.
Deutsche Bank AG, UniCredit SpA and Commerzbank AG are among lenders set to face a smaller hit to their capital ratios in the test compared to the previous edition, Bloomberg reported earlier this month.
The test did include severe economic assumptions that weighed heavily on some firms, notably those active in commercial real estate lending. Frankfurt-based Helaba saw a bigger hit to its capital ratio than two years ago, according to one of the people.
A spokesman for Helaba declined to comment.
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