* Many non-euro zone states to align bank tests with ECB
* Tests need to carry same weight as euro zone's
* Hungary expresses doubts, to use own criteria
* Investors more concerned by economies than regulation
By Laura Noonan
LONDON, Nov 12 EU nations that lie outside the
euro zone plan largely to fall in behind the European Central
Bank when they check the health of their banks, helping them to
avoid a "two tier" outcome in stress tests next year.
Many supervisors in this diverse group of 11 countries told
Reuters they will align their reviews closely with the ECB's
assessment of major banks within the currency bloc, a tactic
that analysts say should dispel any suspicions that their
national tests lack rigour.
In the coming year, the European Union will stage a series
of exercises to test the ability of its lenders to withstand a
future crisis without resorting to taxpayer-funded bailouts,
including in the non-euro zone corners that stretch from Britain
These are billed as the most rigorous assessments the banks
have ever had, designed to remove doubts about their health
after botched EU stress tests in 2010 and 2011 which failed to
reveal major problems at some lenders.
The ECB will conduct "asset quality reviews" (AQRs) of the
euro zone's 128 largest lenders before it takes over supervising
them from national authorities. The AQR will become those banks'
starting point in stress tests which the European Banking
Authority (EBA) will coordinate in all 28 EU countries,
subjecting them to scenarios such as a stock market crash or
abrupt change in interest rates.
These exercises risk claiming some non-euro zone banks as
collateral damage if there is any perception among investors
that results verified by the ECB carry more weight that those
produced by supervisors in countries outside the euro zone.
But this prospect now looks remote in many of the 11
countries which are mostly in central and eastern Europe but
also include Sweden and Denmark, as well as Britain.
A number of authorities said they are taking steps to mimic
major parts of the ECB's exercise, and several said they might
hire external consultants to validate their data.
"We would be eager to take part in the EU-wide asset quality
review, as the co-ordinated effort would ensure comparability of
results," a spokesman for Poland's Financial Supervisory
Authority said. "Otherwise, there will be a needless split of
the EU banking sector into two parts."
A number of banks may need to raise more capital to fill
gaps revealed by the tests, and investors would probably shy
away from a lender if they feared the exercise had failed to
reveal all problems on their balance sheets.
However, investors and banks analysts told Reuters any
differences in the assessments are unlikely to be significant
enough to dent investment in banks outside the euro zone - where
about a quarter of the EU's 43.5 trillion euros of banking
assets are held in standalone banks and domestic groups that
largely come under the local regulators.
FIRST THROW OF THE DICE
The AQR is the ECB's first throw of the dice since it was
tasked with leading the single supervisory mechanism under a
broader European banking union that also aims to harmonise how
failing EU banks deal with creditors and are wound up.
The main object is to avoid a repeat of the banking crisis
that began in 2008, led to taxpayer-funded bailouts of 275
billion euros across the euro zone alone, and was characterised
by disparate responses in different EU member states.
Supervisors in the non-euro zone countries must perform
national AQRs, which will include assessments of whether banks
have properly valued assets on their balance sheets - unlike
during the crisis when highly rated assets such as sub prime
mortgage bonds turned out to be worthless.
Banking systems in the 11 countries are as diverse as their
geographies. Non-performing loans, where borrowers are in
significant arrears on their repayments, range from 17 percent
of the total in Hungary - the second highest in the EU - to 0.9
percent in Sweden - the joint lowest.
Supervisors in Lithuania, Poland, Sweden, Denmark, Croatia
and Latvia - which is due to adopt the euro on Jan. 1 - told
Reuters their AQRs would use the same definitions as the ECB for
non-performing loans and forbearance, when banks give borrowers
more time to catch up on overdue repayments.
KBW bank analyst Ronny Rehn described this as "one the first
milestones" for how non-euro zone regulators would conform with
the ECB review.
Britain has yet to say publicly whether it will use the EBA
definitions for its tests, a spokeswoman for the Bank of England
told Reuters. But Britain, which had to bail out some of its
biggest banks during the crisis, has already conducted stress
tests on major lenders and is generally at least as rigorous as
euro zone authorities in assessing its banks.
A source familiar with the international discussions on
harmonising definitions of non-performing loans and forbearance
said he expected Britain would adopt them. "I don't see any
reason why they wouldn't," he said. "They weren't exactly
exercised about it over the course of the negotiations."
Supervisory authorities in Romania, Bulgaria and the Czech
Republic declined to comment or failed to respond to Reuters
requests for comment on their approach.
KBW's Rehn said national decisions on whether to adopt EBA
definitions would be a first point of judgment. "If a country
says 'I'm not happy using this definition' there might be some
suspicion that their tests might not be as rigorous," he said.
However, he noted the Czech Republic conducted stress tests
every quarter with "fairly harsh assumptions". Most Czech banks
were owned by parents based in the euro zone which will have to
comply with the EBA definitions at group level, he said.
"Czech regulators will likely have to play ball. I think
this applies to all central and eastern European countries
really - Romania, Bulgaria and even Hungary in my view."
POCKETS OF DISCONTENT
Pockets of discontent remain and some lenders may not be
ready to provide all the information that supervisors require.
In Hungary, the central bank said its banks would not be
able to "meet the entire range" of the data needed for the
stress tests, and would not use the EBA definitions until they
become mandatory at the end of 2014.
One senior EU supervisor, who asked for his nationality not
to be disclosed, said he saw no connection between the plans of
the ECB and of his own non-euro zone authority.
Even the most reluctant countries may escape punishment from
investors for any discrepancies in the stress tests.
"If we want some kind of comparison between euro zone and
non-euro zone, we'll simply do that assessment ourselves," said
Robin Creswell, managing partner at fixed income manager Payden,
which has $85 billion under management.
Others would be more concerned with the differing states of
the economies in which the banks operate, said John Ventre, head
of multi-manager at Old Mutual Global Investors.
He pointed to the risk of deflation in the euro zone,
whereas emerging markets outside the currency union commonly
have higher inflation rates.
"Constrained credit growth means that there is a risk that a
nascent euro zone recovery stalls quickly," he said, noting that
more inflationary economies support balance sheets and encourage
lending on profitable terms. "And there is nothing worse for a
bank than deflation because it means that debts grow rather than
shrink in real terms."
His sentiments were echoed by Reg Watson, an equity analyst
at Standard Life Investments. "Depending on which non-euro zone
country you are talking about, these countries have very
differing growth rates," said Watson. "The decision to invest is
more likely to swayed by macro factors than the regulatory
environment that they are subject to."
For Elisabeth Rudman, team leader for the European Financial
Institutions Group at ratings agency DBRS, marginal extra
credibility that will be attached to the ECB countries' results
is dwarfed by concerns about the exercise as a whole.
"The political environment (including a decision on how to
approach the recapitalisation of banks that are solvent but do
not meet the stress test threshold) will inevitably dominate the
perception of the stress test," she said.