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Exclusive: ECB gets pragmatic to keep bank test deadlines in sight

An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8,
An illuminated euro sign is seen in front of the headquarters of the European Central Bank (ECB) in the late evening in Frankfurt January 8,

By Laura Noonan

LONDON (Reuters) - The European Central Bank has quietly made a series of concessions to banks that will make it easier for them to meet the tight deadlines of a landmark review of their businesses, four sources familiar with the process told Reuters.

The sources said the ECB has dropped requests for some difficult-to-obtain details like VAT numbers of company borrowers, waived some interim deadlines and allowed banks to produce data on smaller numbers of loans in some circumstances.

The changes do not compromise the accuracy and thoroughness of the tests, the sources said, but they make it more likely that banks will meet the overall deadline to allow the review's results to be published in October.

This means there is less chance the ECB will lose credibility by failing to hit deadlines that have been described as ambitious from the off, but too much flexibility could be perceived negatively by investors who want the euro zone's banks held up to tough scrutiny.

"There is a danger that by asking for too much detail on loans, the ECB is unable to see the wood for the trees as they get overwhelmed by the density of the data, (but) credibility remains the key watchword on this review," said from Andrew Parry, London-based chief executive of fund manager Hermes Sourcecap.

If there is any hint that weaker banks may escape proper scrutiny, then the whole exercise will be undermined, he added.

The review, billed as the toughest banks have ever gone through, aims to encourage them to recognize losses on loans or investments that have gone bad, allowing them to regain investors' trust and freeing up capacity to grant new loans to help the euro zone's fragile economic recovery.

The ECB has insisted that there is no flexibility around key elements like obtaining independent valuations for collateral held against loans and using external models to challenge banks' predictions of loan losses.

Those key elements are seen as crucial to maintaining the credibility of the exercise which covers the 128 euro zone banks the ECB will begin directly supervising from November, including international titans like Santander and Deutsche Bank and nationally-important ones like Malta's Bank of Valletta and Italy's Monte dei Paschi .

INTENSIVE

Banks have baulked at the demands of the tests, which Dutch bank ING last week said it had "about 200" staff working on full-time. The industry has lobbied the ECB for changes to make the work less onerous at a series of meetings in Frankfurt.

The ECB has made no public concessions.

"It's unfair for the ECB to be portrayed as totally inflexible and lacking any form of pragmatism (although) in the early days they were very much driven by the AQR (asset quality review) methodology," said one source familiar with the review, referring to details in a 285-page manual published on March 11.

The source said that as the process got underway, the ECB had separated its requests for loan data into a "need to have" and "nice to have" column, a point echoed by two other sources. "At one stage, they were asking for about 300 (spreadsheet) cells per loan," the first source said.

"There's been a fairly significant reduction."

The ECB declined to comment.

A separate source familiar with the ECB's thinking said Frankfurt had accepted that some of the difficult-to-obtain data was not necessary to value the loans, but stressed that the data request remains more prescriptive and more onerous than any other review the banks have gone through.

"We had to check several things with them at one place or the other, but all things are being handled very pragmatically, and we were able to sort all of them out in a short period of time," Commerzbank chief financial officer Stephan Engels told reporters at the bank's first-quarter results on May 7, speaking of engagement with the ECB generally.

The first source said the ECB had shown further flexibility by allowing one bank to be judged based on its March balance sheet instead of the December balance sheet initially laid down for all banks, because the bank involved has a financial year that ends in March. The ECB declined to comment.

In addition, two sources said the "sample size", or number of loans banks have to evaluate per portfolio, had been reduced significantly and been halved in some cases, greatly reducing the workload for banks. The third source stressed that this varied greatly across countries. The ECB declined to comment.

TIGHT DEADLINES

Two sources said that the ECB had lightened the banks' loads by waiving a series of interim deadlines and was now only concerned that the major deadlines, including completing the credit file review by June 25, were met.

The ECB declined to comment, but said neither major milestones nor the October deadline would be compromised.

The sources said some banks had fallen behind with the interim deadlines because they had been getting back their bi-weekly data submissions with requests for additional data or data in different forms.

"No-one is catastrophically so far behind they won't make it but it's looking more difficult by the day," one of the sources said of the overall October deadline.

The person familiar with the ECB's position said banks' progress was being monitored very closely and any bank falling behind was set a remediation plan to bring them back up to speed.

On a conference call after its first-quarter results on May 7, ING chief risk officer Wilfred Nagel said the bank had no issues delivering the requested data in time and in full, echoing comments made by Commerzbank's Engels.

For the euro zone banks, the results of the ECB exercise will act as the starting point for EU-wide stress tests designed to see if lenders have enough capital to withstand future crises.

Speaking at their results announcement on May 7, Commerzbank's Engels said the macro economic crises banks are being tested against were more severe than expected but that his bank was well placed to pass the EU tests.

(Additional reporting by Alexander Huebner in Frankfurt and Jemima Kelly in London; Editing by Pravin Char)

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