25 June 2013

SZ: Bundesbank chief urges strict balance sheet test for European banks

Jens Weidmann called for a comprehensive revision of balance sheets of European financial institutions. He said he believed it was absolutely necessary to be able to close banks down.

Translated from the German

The European Central Bank (ECB) intends to inspect closely the balance sheets of those financial institutions which will find themselves under its supervision in the future. In the whole of Europe, their number is expected to be around 130 to 150. With this test, the ECB is trying to determine how healthy the banks in Europe really are. This quality control is more than a purely technocratic matter: it is the litmus test for the new ECB Banking Supervision as its power and authority will depend on it to a large extent. 

The ECB will do its utmost to perform a rigorous test because it does not wish to have to pay for mistakes that were made previously by the national banking supervisors. The governments, however, will hope for a test that is as lenient as possible so that they will not have to pay for any deficits found - which could turn out to be really expensive. Estimates of how much capital European banks may actually require differ considerably. Sometimes a figure in the three-digit billions is quoted, if the banks were to write off their securities at the current market value. The amount available to the ESM for recapilisation, however, is limited to €60 billion.

In an interview with the Süddeutsche Zeitung, Bundesbank chief Jens Weidmann said: "With any responsibility for decision comes an element of liability. If we have a common banking regulation and supervision, then a joint restructuring and resolution mechanism is only logical." The first to pay should be private investors and only if this is not possible, governments should have to decide whether to use public funds.

One way to inspect the banks in question would entail the national supervisors submitting their bank reports to the ECB - but this would have little value as the ECB is set on avoiding mistakes of the past, when national supervisors failed to identify risks. In a second scenario, supervisors are to inspect the balance sheets thoroughly and clean them effectively. In this case the ECB would have to rely on external auditors to keep national interests in check. The auditors would look either at each balance sheet item individually, or they might limit their inspection to examining only the most critical assets.

If things go well, this test will solve a big problem: the credit crunch in southern Europe. "It's all about having sufficiently capitalised banks with sustainable business models. Only then cam the banks carry their own risks and fulfil their purpose - to lend money", Weidmann said.

Full article (in German)

© Süddeutsche Zeitung GmbH