Bank stress tests must bite this time-EU official

LONDON, Sept 24 Tue Sep 24, 2013 6:44am EDT

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LONDON, Sept 24 (Reuters) - The toughest health check planned so far for European banks must be rigorous enough to stop the region's lenders being more lowly rated than their American rivals, a senior European Union official said on Tuesday.

The European Central Bank (ECB) is preparing a so-called asset quality review of the 130 euro-zone based banks it will directly supervise from October 2014, including the likes of Deutsche Bank, Societe Generale and Santander.

It will outline its test next month.

Alongside this, the EU's European Banking Authority (EBA) will oversee the same review for banks in non euro zone member states, as well as a stress test of lenders across the 28-country bloc.

The two tests are likely reveal that some banks need more capital.

Martin Merlin, head of financial services policy at the EU's executive European Commission, said overly optimistic asset valuations allowed big banks to pass previous stress tests.

"The next round will be crucial in countering the perception that European banks are less safe, less capitalised than U.S. banks," Merlin told an Association for Financial Markets in Europe (AFME) conference.

"We have to do a very serious job on the assets side this time. We need a stress test exercise that bites throughout the EU, that is robust, that is sufficiently transparent that should help bring back confidence and liquidity back to the European banking sector," Merlin said.

In past tests governments have balked at allowing regulators to be rigorous in valuing government bonds held by banks on their main banking books. Many such bonds have been under massive stress due to the indebtedness of governments, some of whom had to be bailed out.

Merlin said the new tests were being well managed by the ECB and EBA and only one set of results will be published to minimise market uncertainty.

"Two sets of results would be very confusing," Merlin said.

The results are widely expected in mid 2014 but one official with knowledge of the tests said the outcome may not be known until late next year or even early 2015.

The ECB's own balance sheet assessments could take up to a year, the official said.

EU policymakers worry that valuations of banks in the region are lower than those of their U.S. peers, making it harder to find private funding to end a reliance on ECB money.

Price to book values for instance of continental European banks are around 0.5 to 0.6 times on average, meaning lenders are worth less than the sum of their assets. The comparable figure in the United States is around 1 or just above, Peter Praet, an ECB Executive Board member, said last week.

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