PARIS European governments are hoping a leading role for the European Central Bank (ECB) and a more detailed review of assets will give the latest round of stress tests for the region's banks what they have lacked in the past - credibility.
Europe needs an open and comprehensive review of its banks if it is to persuade investors and taxpayers that its financial industry is on the mend, after previous assessments missed problems in countries such as Ireland, Spain and Cyprus.
"We will need a better starting point," Piers Haben, a senior official at the European Banking Authority (EBA), told an audience of several hundred bankers at the Institute of International Finance's spring meeting in Paris on Tuesday.
"Ensuring we have proper data and assessments of asset quality is key."
The ECB wants a thorough examination of the euro zone's banks before it takes over supervision of the sector in mid-2014 and the EBA will play a key role in the stress tests, which aim to gauge how banks can cope under different economic scenarios.
Unlike the United States, where lenders were given a thorough examination followed by recapitalisation in 2009, Europe's banks have faced a series of half-hearted assessments.
The sector passed the first test in 2009, carried out by the EBA's predecessor, with flying colours, and in 2010, only eight lenders failed out of 90 tested with a collective capital shortfall of just 3.5 billion euros (2.9 billion pounds).
In 2011, the EBA got tough, telling the sector collectively to raise 106 billion euros by mid-2012.
That prompted an outcry from bankers, highlighting the fine line the authorities have to tread between being too lenient and being so demanding that banks rein in activities essential to the economy, such as lending.
"The difficulty of stress tests shouldn't be underestimated," Credit Agricole (CAGR.PA) chief executive Jean-Paul Chifflet told the audience in Paris, pointing to the difficulty of devising a stressed scenario that was "not catastrophic but difficult and plausible" and the importance of clear communication to markets about the results.
Phone calls between executives at Anglo Irish Bank published this week show how catastrophically policymakers had got it wrong at the height of the financial crisis in 2008, when one Anglo banker admitted the sum of 7 billion euros it was demanding from Ireland's central bank had been "picked out of my arse".
Anglo, since closed down, accounted for the lion's share of Ireland's 67.5 billion euro bank bailout.
THIS TIME IT'S DIFFERENT
Officials involved in the 2011 stress tests told Reuters there were blind spots last time around.
Chief among them was the second-hand data the EBA was working with, which was collected by national regulators and then subject to peer review, where teams drawn from across the European Union analysed the results from other countries.
This time, for euro zone banks at least, the ECB itself will supervise an "asset quality review" at banks which will look much more closely at how banks assess risks attached to loans.
Britain, which is outside the euro zone, has just carried out an asset quality test on its eight biggest banks, requiring them to raise an extra 13 billion pounds in capital.
"In terms of a process, the asset quality review would be much more detailed and have a much sounder foundation," Tom Huertas, a former alternate chair of the EBA who is now a partner in Ernst & Young's financial risk practice, told Reuters.
The other flashpoint in 2011 was the treatment of sovereign debt and the fact that banks did not have to assume losses on government debt they classified in a certain way, even if selling those bonds immediately would trigger a loss.
This time, banks will have to account for potential losses.
"The treatment of government debt will undoubtedly be more rigorous," said Huertas, echoing the views of several other industry figures who spoke to Reuters.
(Editing by Carmel Crimmins and Mark Potter)