| LONDON, Sept 24
LONDON, Sept 24 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
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
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
The two tests are likely reveal that some banks need more
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.