* ECB releases 285-page manual for asset quality review
* On avg 1,250 loan files per bank to be checked by Aug
* Common guidelines for asset valuation, loan impairment
* Banks may be asked to change internal models, policies
* Collateral values updated if over 1 year out of date
By Eva Taylor
FRANKFURT, March 11 The European Central Bank
(ECB) will press banks to revalue their assets and take a more
realistic view on likely losses when it probes their balance
sheets in coming months, signalling a new, more aggressive era
of banking supervision in the bloc.
Publishing guidelines on Tuesday for its forthcoming asset
quality review (AQR), the ECB said it would trawl through
trillions of euros of assets at 128 leading banks between now
and August, aiming to ferret out any problems before it takes
over as the euro zone's banking watchdog in November.
The exercise is part of a bigger plan to harmonise the way
banks are supervised and if necessary wound down, aiming to
restore the sector's stability and avert a repeat of the debt
crisis which cost trillions in taxpayer bailouts.
While preparations for coordinated supervision are already
in full swing, European ministers were still trying to agree on
how to build a safety net for failing banks on Tuesday in
Brussels, redoubling efforts to avoid an embarrassing delay to
the euro zone's centrepiece crisis reform.
Sabine Lautenschlaeger, vice chair of the banking watchdog
and a member of the ECB's executive board, told the Wall Street
Journal she expected some banks would need to improve their
capital situation as a result of the tests, either by raising
funds or selling assets, without giving a specific number. "It's
the last chance to clean up," she was quoted saying.
The asset quality review will be followed by "stress tests"
to see how banks would fare under certain shock scenarios. All
results will be released in October.
Estimates of banks' capital shortfall range from 280 billion
euros ($388.6 billion) to as much as 770 billion.
Previous stress tests of leading EU banks failed to
completely root out problems in the sector and the scope of the
current review that combines backward looking checks and forward
looking stress scenarios is unprecedented.
Euro zone banks have never before been measured against
common thresholds, such as a single definition of when loans
become impaired, and many have never had their books
interrogated in such detail. Previous tests relied on locally
"We expect the AQR and stress test to introduce greater
transparency on 'problem assets' and speed up the healing
process," said analysts at Citi.
Many banks have already been raising funds, shedding assets
and writing off bad debts ahead of the review and stress tests.
Italy's Unicredit for instance on Tuesday posted a
shock 14 billion euro loss after writedowns on goodwill and bad
loans, as it moved to clean up its balance sheet ahead of the
ECB's health check.
Once the results are known, the ECB will push banks to
reflect some of the findings in their 2014 accounts.
Banks will only be expected to change their 2013 accounts in
the unlikely event that the review highlights issues that should
lead to a restatement according to local law, it said.
The ECB's guidelines also set out different scenarios when
loans should be classified as impaired. For example when a
debtor has requested emergency funding from a bank, or if a
company that has taken a loan gets into financial difficulty and
experiences a material decrease in turnover or the loss of a
As part of the exercise, the teams will also check whether
collateral, for example in the form of real estate, aircraft,
ships or artwork, is correctly valued, with help from external
experts or by updating recent independent market valuations.
Collateral that has not been valued in the previous 12
months will have to be re-evaluated.
Collateral valuations are one of the biggest sources of
uncertainty for banks in Italy. Sources told Reuters on Friday
that the Bank of Italy was hiring up to five real estate
consultants to assess whether banks are correctly valuing
property used as loan collateral.
Beyond loans, "level 3 assets" - a broad group of assets
that are difficult to value - will also be assessed. These
include derivatives, assets such as real estate holdings which
banks have acquired through foreclosures, participation in
private equity deals and special investment vehicles.
The ECB will run a more in-depth review of such assets at 29
banks with material exposures, which include Deutsche Bank
, Commerzbank, Societe Generale,
UniCredit and Santander.
"It is expected that, in most cases, fewer than 10
derivative pricing models will be reviewed for each bank
included in the trading book review, depending on the size of
the bank's exposure to level 3 derivatives," the manual said.
Some banks included in the trading book review will have no
relevant level 3 derivative pricing models to review, it added.