LONDON 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 process."
State Street, the only bank to comment on its inclusion, said it was “working with the ECB on finalizing 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)