"The Single Supervisory Mechanism (SSM) will take over supervision of the significant euro area banks in November. In advance, we are conducting a rigorous comprehensive assessment of banks' balance sheets that will ensure that our Joint Supervisory Teams, comprising supervisors from the ECB and the national competent authorities (NCAs), can start supervision with a clean slate. We can thus base supervision on a thorough evaluation of the condition of the individual institutions, not only regarding market and credit risks in individual banks, but also processes, policies and accounting specifications, and the sensitivities of core business fields - and all this with a higher degree of comparability thanks to the harmonisation of the methodologies and implementation of the assessment.
But the importance of this exercise extends well beyond the supervisory realm - one could say that the supervisory aspects are only a positive side effect. The objective of the comprehensive assessment is to restore trust in the euro area banking system by creating transparency on the condition of bank balance sheets and enforcing repair - where necessary. This is crucial for the macroeconomic environment of the monetary union, since credit supply to the real economy in Europe is strongly linked to banks' financing services and thus dependent, too, on banks' capital and funding conditions - although this is not the only prerequisite.
At the current juncture, banks in the euro area continue to suffer from general distrust concerning the quality of their assets. Many market participants believe that bank balance sheets may still carry substantial hidden losses, and the resulting uncertainty is directly reflected in - among other things - refinancing costs and stock market valuations. Even small deteriorations in a bank's performance can sometimes suffice to provoke speculation and negative market reactions.
This lack of confidence affects bank lending conditions, both local and cross-border, for firms in the real economy. Banks in the euro area need to respond to these market expectations and uncertainties. They increase their capital ratios by retaining their earnings, holding off lending and avoiding additional risks. Small and medium-sized firms in peripheral countries are particularly affected by the sustained shortage in credit supply."
"The comprehensive assessment needs to be a success, and we have catered for the necessary critical factors:
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Our assessment is much more comprehensive than previous stress test exercises - not only in name!
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We have strict quality assurance in place for all phases of the assessment.
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Closely monitored corrective actions based on the outcome of the comprehensive assessment will make Europe's banking sector stronger and more solid."
Full speech
© BIS - Bank for International Settlements
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