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The ECB is emphasising that the AQR is not a stress test, which would simulate the effect of various economic scenarios on banks’ balance-sheets. Instead it is doing a preliminary examination to ensure that it understands what is on banks’ books in the first place. National regulators fret that they will be embarrassed by what it finds. This has prompted some to push back hard to limit the scope of the ECB’s inquiries.
Surprisingly, this resistance is not coming from countries on Europe’s periphery such as Spain, which have much to gain from the imprimatur of ECB supervision. Rather it is coming from core countries such as France and, to a lesser extent, Germany, where seemingly well-capitalised banks may come out of the asset review looking threadbare.
One issue is the “risk-weighting” of assets, a process by which banks adjust the size of their capital buffer to account for the riskiness of their lending. The ECB is likely to push for greater consistency in risk-weighting, which could force banks in France, Germany and elsewhere to raise capital.