Exclusive: ECB keeps banks on tight leash with October test results - sources

FRANKFURT Wed Jul 9, 2014 4:13pm EDT

The headquarters of the European Central Bank (ECB) is pictured prior to the bank's monthly news conference in Frankfurt July 3, 2014.         REUTERS/Ralph Orlowski

The headquarters of the European Central Bank (ECB) is pictured prior to the bank's monthly news conference in Frankfurt July 3, 2014.

Credit: Reuters/Ralph Orlowski

FRANKFURT (Reuters) - The European Central Bank aims to keep banks on a tight leash in the final phase of a balance sheet health check in October, giving them just 48 hours to review the test results before publishing them, two persons familiar with the matter told Reuters on Wednesday.

The comprehensive assessment, conducted by the ECB before it starts supervising the euro zone’s top 120 banks from Nov. 4, will examine banks’ balance sheets and weigh up their ability to withstand shock and stress.

The assessment includes an asset quality review, or AQR, and a stress test that runs banks' books through tough scenarios to check the robustness of their finances.

Banks delivered preliminary results of the stress tests conducted with the London-based European Banking Authority to the ECB around two weeks ago, said one person attending the ECB meeting in Frankfurt.

“As a consequence, most banks should know whether they face problems at the stress test or not,” he said.

ECB officials proposed revealing the results to banks for accuracy checks 48 hours before making them public in October, raising the ire of some bankers who say they need more time, according to two bankers who attended the meeting.

“Banks can't comprehend this highly complex AQR process within 48 hours in a way that they can sign it off in good conscience,” said one person familiar with the matter.

The review, unprecedented in Europe for its complexity and breadth, is designed to ensure the health of the euro zone’s financial system and restore confidence in it.

The ECB faces a delicate balancing act as it tries to maintain the secrecy of its work to avoid any breaches of market disclosure rules, while not blind-siding banks with unforeseen capital demands that they could struggle to fulfil.

The ECB said the 48-hour deadline was one element in an ongoing dialogue with the 128 banks it was reviewing.

“We will communicate with the banks directly concerning exact timelines for the disclosure of the final result of the Comprehensive Assessment closer to the end of the process,” said a spokesman in an emailed statement.

The ECB aims to publish figures for each bank including total assets, risk exposure and a widely used gauge of balance sheet muscle called CET1, or common equity tier one capital, said one banker attending the meeting.

Moreover, the ECB wants to publish banks’ leverage ratios, a proposal criticized by several banks because this measure, though widely used to compensate for distortions in CET1 calculations, is not yet a formal regulatory requirement in Europe, two sources said.

The comprehensive review is designed to restore confidence in a banking market that has traded at lower valuations than the U.S.'s since the financial crisis, as investors pondered the real state of European banks' balance sheets.

All results will be released in October. Banks have made extensive preparations ahead of the tests, including raising over 100 billion euros ($136 billion) in the nine months to April, shedding assets and writing off bad debts.

(Additional reporting by Andreas Framke and Laura Noonan; Editing by Robin Pomeroy and Hugh Lawson)