* Six non-EU banks to take part in European stress tests
* Non-EU banks have traditionally been exempt
By Laura Noonan
LONDON, July 16 A handful of global banks are
bracing themselves for their first results from Europe's bank
stress-testing regime, which will tell them in October whether
they have enough capital to withstand future crises.
Banks outside the European Union have traditionally been
outside the scope of EU stress tests, but the European Central
Bank (ECB) told Reuters it will also run its own stress tests on
local subsidiaries of a handful of non-EU banks this year.
Five of the banks - Bank of New York Mellon, State
Street, UBS, Royal Bank of Canada and
Russian Commercial Bank - would not comment in detail on the
implications of their inclusion. The sixth, Bank of America
Merrill Lynch, was not available for comment.
European banking experts played down the impact of the
development and said that what the ECB was proposing to do was
no more severe than the long-established practice of the U.S.
Federal Reserve testing the likes of Royal Bank of Scotland's
Citizens unit and HSBC's U.S. offshoot.
But the move marks a European first and one source familiar
with the process said the prospect of undergoing the tests had
rankled some of the banks affected.
"It's new and unusual, but I don't see it as a major
departure," said Tom Huertas, a partner at consultancy EY who
formerly chaired the European Banking Authority, which carries
out EU-wide stress tests. "It's a natural progression."
Foreign banks' EU operations are most visible in London,
where giant towers for banks including JPMorgan, Citi
, Morgan Stanley and Credit Suisse
dominate the skyline in the Canary Wharf financial district.
Such banks have traditionally been outside the scope of EU
stress testing, which is carried out at the highest level of
consolidation so only includes banks whose highest holding
company is in the EU.
Yet with the ECB preparing to take over the supervision of
120 of the euro zone's largest banks on Nov. 4, the rules of
engagement are changing.
The ECB's list of 128 banks whose books will be examined in
an asset quality review (AQR) includes six non euro zone banks.
"Those (non EU) banks will carry out a stress test based on the
EBA methodology, the same as banks that fall within the EBAs
remit," a spokesman for the ECB told Reuters.
"The results will be communicated as a part of the
comprehensive assessment, similarly to other banks in the
State Street, the only bank to comment on its inclusion,
said it was "working with the ECB on finalising the asset
quality review and stress tests and looks forward to the results
being published in October". A spokesman declined to comment
further on the implications of the bank's inclusion.
The ECB also confirmed it would give separate stress test
results for euro zone subsidiaries of banks whose parents are
included in the list of the 124 EU banks the EBA will stress
test, such as Ireland's Ulster Bank.
In that case, the ECB will publish a stress tests result for
Ulster Bank as a standalone, while the EBA will publish a result
for Ulster Bank's UK parent Royal Bank of Scotland.
For the most part, the non-EU banks coming under scrutiny
are not mainstream retail lenders. Dublin-based Merrill Lynch
International, for example, books complex financial transactions
for its group's international clients.
The potential capital implications of the tests are unclear
and none of the banks would comment.
The ECB's foray into stress testing non EU banks comes
against the backdrop of a global power struggle between
regulators over the demands they impose on each other's banks.
Nicolas Vernon, of Brussels-based thinktank Bruegel, said
the ECB was a long way from copying the Federal Reserve's action
of imposing new capital requirements on foreign banks.
"Yes it is a change for these banks, they have a new
supervisor and a new supervisor is doing things differently," he
said. "But it's not a change in the rules".
(Additional reporting by Katharina Bart in Zurich, Cameron
French in Toronto, Ross Kerber in Boston and Alexander Winning
in Moscow; Editing by David Holmes)