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ECB outlines new bank stress tests

Wednesday, October 23, 2013 - 01:54

Oct.23 - The European Central Bank has outlined which top euro zone banks it will put through their paces next year, as part of a health check of the sector. The ECB is staking its credibility on the review. It will take place before it takes on the new role of supervising the region's top lenders and is the first step towards banking union. Joanna Partridge reports

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It's getting ready to become the euro zone's banking supervisor. Now the European Central Bank has outlined which lenders it's going to put through a health check next year. The ECB says it will look at 128 banks right across the euro zone to find any hidden risks on their balance sheets. The central bank is staking its credibility on this review before it takes on its supervisory role, in the first step towards European banking union. The ECB's called on governments to agree on a strong single resolution mechanism to help or wind down banks in trouble. But this second stage of the banking union isn't yet completed, as politicians discuss how much cost taxpayers would pick up. ECB President Mario Draghi told Reuters the ECB asset reviews and the resolution mechanism must be separated. SOUNDBITE: Mario Draghi, ECB President, saying (English): "The ECB wants to have full responsibility for the assessment, but nothing to do with what has to be done following the assessment, namely the task of the resolution authority." The tests will begin next month and last for a year. Under the so-called asset quality review, lenders will be expected to have a capital buffer of 8% and will have to make up for any shortfalls. It's designed to improve transparency in the sector and rebuild confidence after the financial crisis. Jessica Ground is from Schroders. SOUNDBITE: Jessica Ground, UK Fund Manager, Schroders, saying (English): "If you look at somebody like Angela Merkel who really is the architect of this sort of union and bringing it together, she's prepared to play a long game. Europeans' banking problems aren't going to be sorted overnight but there is a clear momentum and travel direction that she needs to get to." European banking stocks slid on news of the review. There are also fears that if the review is too strict and reveals unexpectedly large problems at some banks, it could backfire and lead to market concerns about the sector rather than confidence.