07 April 2014

ECB/Nouy: European banks are better than their market assessment

What kind of state are European banks in? Why does the ECB need to carry out stress tests?

The situation of European banks is better than the market assessment. The market has underestimated the work that has been done in terms of repairing the balance sheets of European banks. For example, since the outbreak of the crisis, banks have received capital injections of €450 billion from both the private and the public sectors. Furthermore, the median core Tier 1 capital ratio of large European banks stands at 11.2 per cent, which represents a four percentage point increase since the beginning of the crisis.

And this despite the fact that the definition of the ratio has been getting stricter every year. I consider that, for the time being, markets have not seriously taken into account these improvements, as reflected in banks’ stock market values, which are lower than their book values. This is why, with the stress tests to be held by November, we are moving ahead with the comprehensive assessment of large European banks, in order to ensure transparency and to enable markets to evaluate properly the improvement of bank balance sheets.

What are you expecting from stress tests?

First of all, that any capital needs which might emerge will be funded by the private sector. There is adequate liquidity in the market to be used for capital injections to the banking sector and the transparency of bank balance sheets which will result from the ECB’s stress tests will help banks to raise the necessary funds from the market. Of course, I acknowledge that it would be difficult for the market to respond if all banks were to resort to the same investors at the same time. In this case they would have to have recourse to public backstops at the national and, as a last resort, European levels. In an ideal world, this would be the last time that public money is used to rescue banks in the euro area.

Will the fund’s €55 billion endowment be sufficient?

Under normal circumstances, it will. However, in order to cope with the needs that arise at the outbreak of a crisis, such as the one we have experienced, there are concerns that more money might be necessary. In their recent compromise on the single resolution system of the Banking Union, euro area countries agreed to provide the Single Resolution Fund with borrowing capacities.

In the case of Greece, the IMF expressed doubts about the result of stress tests carried out by the Bank of Greece. According to the IMF, needs were more than double the amount proposed. 

I am certain that my colleagues at the Bank of Greece have done their very best to assess the situation properly. This being said, Greece’s four systemic banks will be subject to the ECB’s comprehensive assessment, just like all other large European banks. It will provide an additional benchmark.

The main objective of the banking union is to eliminate the risk of a banking crisis turning into a fiscal crisis again. Has the cord between banks and the state been cut?

This cannot be done from one moment to the next. It is done gradually. We are working in this direction and significant steps have been made. The progress achieved in terms of the banking union within two years has no precedent in Europe; however, there is still more to be done and more will be done. What is important is that the situation today is much safer than what it was at the beginning of the crisis.

You have stated that you will not hesitate, if necessary, to resolve a bank. Aren’t you worried that this might create a domino effect?

I think that we have to stop rescuing banks which are no longer viable. Europe is not lacking banks or banking services and I believe that this will be good for strengthening healthy competition in the sector. Of course, resolution should be carried out in an orderly manner to avoid creating problems in the system, which is the reason why bank rescues happened in the past. But now we have a resolution plan, appropriate mechanisms, enforcing authorities and necessary funds, which enable us to proceed with the resolution of a bank in a concerted manner. We have all the tools to make this easier.

The procedure for bank resolution is characterised as being complex, since both the ECB and state authorities will be involved. In practice, can it be effective?

The procedure is less complex today than it was some weeks ago. The latest compromise among European states is going in that direction. In theory, although it has not yet been tested, a bank can be resolved in a weekend.

Full interview

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