Bank stress tests to put EU finance regulation in spotlight
Lack of any effective European supervision a concern to Rehn
Published 08/03/2011 | 05:00
NEW stress tests on the ability of Europe's banks to withstand future losses will also be an "important litmus test" of the health of Europe's financial regulation regime, European Commission economics chief Olli Rehn said yesterday.
The comments came after the European Banking Authority (EBA), which is responsible for carrying out the tests, revealed plans to introduce a "near fail" category that would identify banks that met the minimum standards but remained at risk.
The pan-European stress tests are kicking off over the coming weeks, and will deliver results in June, some three months after the Irish authorities announce the results of separate stress tests being carried out by the Irish Central Bank.
The first round of European stress tests, carried out last summer, was widely discredited for handing out pass results to banks like AIB -- which needed to be rescued by the State just three months later -- and for recommending that injections of just €3.5bn were needed across Europe's banking system.
Speaking in Luxembourg yesterday, Mr Rehn said the "lack of any kind of effective European level supervision" meant that there was a "certain variety of implementation" in the last round of stress tests.
The upcoming tests "will be a very important litmus test for this new European architecture of financial regulation and supervision", he added.
Meanwhile, EBA chairman Andrea Enria said the tests could be made more credible by introducing a new "near fail" category.
"What I would very much like to see is not a simple pass-fail outcome to these tests -- if you pass, nothing has to be done; if you fail, you have to raise capital by that amount," Mr Enria said.
"It would be nice to have supervisory actions also for banks that have maybe passed the test, but are very close or have other areas of concern," he added.
Authorities in Ireland are planning the local stress tests to be at least as harsh as those to be carried out by the EBA in the summer, to avoid a situation where the Irish banks are given one capital target in March and an even higher one in June.
The new Programme for Government proposes that no more cash will be put into the Irish banks until after they've come through the March stress tests. Up to €10bn could go in at that point, depending on the results of the tests. (Additional reporting, Bloomberg)