While stressing he could not prejudge the review, which consists of an overall assessment, a so-called asset quality review and stress tests, the former governor of Portugal’s central bank pointed out that big banks’ capital ratios were on average stronger in Europe than in the US. “The situation of the European banks is better than market perceptions”, Mr Constâncio told the Financial Times. “If you take the largest European and American banks, you find that the median common equity tier one capital of European banks is slightly above the median of US banks.”
It is a crucial test for the ECB and Mario Draghi, its president. Mr Constâncio is coy about revealing too much before Mr Draghi unveils it later in the month, but he is clear that each bank must be examined on the basis of its own particular risks. “We will [sample] different types of asset classes. Of course we will define priorities according to the known situations in each country. In some places, real estate poses potentially more problems than other asset classes. In other countries it’s shipping loans and we will take that into consideration in the size and depth of the sampling in our exercise.”
“We don’t have a particular date [for announcement of the results]”, he says. “But certainly we will have to have it by next [autumn] when we’ll start to supervise.”
At the end of it all, says Mr Constâncio, the ECB will be able to come up with a new scoring system for banks’ financial health, modelled on the US “Camels” system which gauges the strength of capital, asset quality, management, earnings, liquidity and sensitivity to market risk. “We will try by next year to start implementation of a harmonised risk scoring [system]”, he says.
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