March 4, 2014 / 1:56 PM / in 4 years

UPDATE 1-BoE's Cunliffe says EU banks tests must be credible

By Huw Jones

LONDON, March 4 (Reuters) - 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. {ID:nL5N0L5203]

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.

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