* Stress test may run parallel to asset review - source
* Sequence of bank health checks is key to their success
* EBA favours running asset checks before stress tests - source
By Laura Noonan, Alexander Hübner and Eva Taylor
LONDON/FRANKFURT, Aug 16 (Reuters) - Europe has set itself a “completely illusionary” timetable for the next round of bank health checks and risks having to cut corners to meet deadlines, a source involved with the preparations told Reuters.
Regulators may run the long-awaited stress tests before completing essential preparatory work such as asset quality checks, the source said, a decision that could compromise the quality of the results.
Poor-quality results from rushed tests would complicate the ECB’s task as it assumes new and challenging responsibilities as the single supervisor for euro zone banks in 2014, viewed as essential to making the currency bloc a coherent economic unit.
The source described the timeline and sequence as “completely illusionary” given the amount of work to be done to produce robust asset checks ahead of the stress tests, and to do so with more credibility than before.
“This is more than a normal audit. Banks will have to fill out enormous excel tables,” the source said.
The timing issue highlights how the introduction of the new supervisory body could be upset, potentially destabilising the first step towards banking union aimed at breaking the negative feedback loop between indebted states and banks.
Policymakers at the European Central Bank had initially hoped that the asset review would feed into the stress tests in part because it is difficult to measure the sturdiness of a bank without knowing precisely the contents of its balance sheet.
Both measures are prerequisites for the banking union. The ECB wants to assume its duties knowing the state of its banks. The asset quality review is also meant to draw a line between past and present problems, should any bank go bust.
“It should be noted that this is a complex project that is still evolving in terms of timing and methodology,” said a source with one eurozone supervisory authority.
An EU source familiar with the 2014 preparations said the European Banking Authority favoured running the asset quality review first and then using it as an input for the stress tests.
The EU source said some parties, including the EBA, even favour publishing the results of the asset quality review first, so analysts and investors can assess the current position of the banks based on those numbers.
The next round of EU banking stress tests, designed to reassure investors about the soundness of banks’ capitalisation and their ability to withstand future shocks, was originally due to take place in 2012 and has been repeatedly postponed.
A final timeline is now on hold until the ECB is empowered to take over supervision of banks in the 17 euro zone countries, powers that are now expected to be conferred on the ECB following a vote of the European Parliament on Sept. 10.
The ECB won’t actually start operating as supervisor until at least twelve months after the regulation is adopted, Executive Board members Yves Mersch said in a London speech in May.
Both he and fellow board member Joerg Asmussen have said in recent months that the asset quality review could start at the end of this or beginning of next year, and that the outcome would be an important input for the stress tests.
“Our objective is ... to start with a clean slate and to restore credibility in the European banking sector after two previous stress tests failed to do so. We are therefore aiming for the assessment to be as rigorous as possible,” Asmussen said in June.
Results of both exercises could be published in mid-2014, just before the ECB is scheduled to become the region’s supervisor, Mersch said in his May speech.
An ECB spokeswoman said there had been no final decision regarding the announcement of the results of the balance sheet assessment. ($1 = 0.7538 euros) (Additional reporting by Jonathan Gould in Frankfurt, Editing by Thomas Atkins)