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Domestic regulators may order banks to tap the market immediately if an Asset Quality Review ending in July shows they need more capital, according to law firms including Clifford Chance LLP. The risk is that market volatilitycould rise if multiple announcements cast doubt on the ECB’s control of a process designed to clean up balance sheets.
“This is the biggest blind spot in the ECB’s programme", said Nicolas Véron, a fellow at the Bruegel institute in Brussels and the Peterson Institute for International Economics in Washington. “The banks are still subject to national law, and it’s not clear to me that the ECB had fully integrated this into their planning for the Comprehensive Assessment. They don’t seem to have a very clear stance.”
The ECB has said the AQR and stress test are related stages in a single exercise and there will be no partial reporting of results before the process finishes in October. The central bank will become the euro area’s bank supervisor on November 4. “There will be a comprehensive judgement communicated at the end", Ignazio Angeloni, an ECB official helping to oversee the tests, said in October last year. The institution will announce a “distilled” estimate of capital requirements combining the results of the AQR and the stress test, he said.
An ECB spokeswoman said in an e-mail that the central bank is drawing up a plan on how to communicate with lenders during the assessment. While the ECB has said it won’t tell banks the results of the AQR, disclosure during the three months before the stress test ends may still be necessary. National regulators will know the AQR results and are obliged to tell a bank if it needs to raise more capital, according to Simon Gleeson, a financial regulation lawyer at Clifford Chance in London. The bank must then “as a matter of securities law, disclose a capital shortfall", he said. “How exactly are the capital markets going to deal with all these banks going to market in the same three month period?”
The ECB says in its 285-page manual that events that would trigger national reporting requirements, such as the discovery of a breach of accountancy rules, are unlikely. It says it won’t require banks to restate last year’s accounts except in the case of accounting irregularities. That might not prevent banks from adjusting accounts for the current year. A footnote in the manual states that “there is a possibility that some profit and loss adjustments that will be recognized as a result of the AQR are already booked in interim financial statements before completion of the Comprehensive Assessment". The ECB hasn’t said how that process will be managed.