By Huw Jones
LONDON, March 4 European Union stress tests of
more than 100 top banks must be credible and transparent enough
to draw a line under past failures, Bank of England Deputy
Governor Jon Cunliffe said on Tuesday.
As part of efforts to ensure there can be no repeat of the
region's debt crisis, the EU's banking watchdog, helped by the
European Central Bank, will test 124 leading banks to make sure
they hold enough capital to withstand rocky markets.
UK regulators have been sceptical about past tests by the
European Banking Authority and its ability to stop countries
shielding weak banks. Some lenders passed previous tests only to
be bailed out later.
This year's tests will prepare the ground for the ECB to
supervise directly some 30 euro zone lenders from November. The
new role of the ECB is part of a banking union plan that
European leaders hope will help draw a line under the region's
debt crisis by breaking the sometimes destabilising link between
lenders and public finances.
"I think they have a huge incentive to do it properly
because they (ECB) are taking these banks on," Cunliffe told a
House of Lords committee.
As a former British ambassador to the EU, Cunliffe was
chosen as deputy governor at the BoE to forge a strong
relationship between the central bank and the ECB as the two
institutions become the EU's most important banking supervisors.
While some euro zone countries still sit on large amounts of
debt, it will be difficult to completely break the link between
sovereigns and their banks, Cunliffe said.
It was important that the methodology and the scenarios used
in the stress tests were fully transparent to allow investors to
run their own tests, he added.
"The history of stress tests in the euro zone and in the EU
has not been particularly strong and it's important that this
exercise is credible," Cunliffe said.
Britain has already conducted a review of balance sheets at
UK banks, a step the ECB is now undertaking with the lenders it
will supervise as preparation for the EU stress test.
The UK also plans to conduct stress tests along the lines of
those in the United States, which were seen as having drawn a
line under the 2007-09 financial crisis.
Cunliffe said another element of the euro zone banking
union, a single mechanism for closing failed banks, does not
look streamlined enough for emergency situations.
While critics want the euro's financial centre to shift from
London to within the single currency area, this is not a view
shared by many European governments, given the recognition of
the expertise of the City of London, Cunliffe said.
"I do think a sizeable proportion of people in the EU
realise it's not a question of London or Paris or Frankfurt, but
London or Singapore or New York," Cunliffe said.