LONDON/FRANKFURT (Reuters) - The European Central Bank’s unprecedented health check of the euro zone’s banks will not solve the sector’s problems and could threaten the ECB’s credibility, a German professor has told the EU.
The ECB is checking whether the 130 largest euro zone banks have valued loans correctly and set aside sufficient capital to ride out future financial shocks so the lenders will have a clean bill of health when it becomes their supervisor on Nov. 4.
The lengthy review comes to an end with the results’ release on Oct. 26, a date keenly awaited by investors and market participants seeking a clearer view of the sector’s health.
But Sascha Steffen, Professor at Berlin’s European School of Management and Technology (ESMT), told MEPs that time constraints forced the ECB into a flawed assessment that will not do enough to free up banks to lend again, a crucial aim of policymakers frustrated with the euro zone’s failure to generate economic growth.
“The tests are weaker than they should be, that’s why we probably don’t see the clean-up of the balance sheet that we would like to see,” Steffen, told Reuters in a telephone interview.
In his paper, he warned that a failure to identify and deal with problem assets, coupled with other flaws in the tests, could put the ECB’s reputation “in danger” and leave the financial system vulnerable.
He said he presented the paper to members of the European parliament’s economic and monetary affairs committee, which will meet with Daniel Nouy, the head of the ECB’s Single Supervisory Mechanism (SSM), on Nov. 3.
The ECB declined to comment.
ECB President Mario Draghi said last week the comprehensive assessment — as the bank health checks are also known — would put banks in a better position to lend, adding that he expects bank lending to pick up soon in 2015.
In his paper, Steffen, who has published several previous pieces of research on the ECB exercise, said the ECB’s assessment does not take into account systemic risk, and claims that lack of clarity about how states will fund future bank bailouts “may have induced the ECB to water down the stress test scenarios”.
The European Systemic Risk Board (ESRB) designed the adverse scenario for the European-wide stress test that checks how banks hold up under shocks such as a fall in house prices or rising funding costs.
“It (the paper) shouldn’t be read like a tirade against the ECB: the stress test is an absolute improvement over what happened last time, definitely. (But) comparing this also to what happened in the United States, there is still much more room for improvement,” Steffen said.
He added that while the U.S. tests did not specifically model systemic shocks, banks had to answer questions like how well prepared they are to deal with something like the collapse of a major bank.
“The various things which I listed in the report which are missing and which could be done better, these are things which need to be addressed and will be addressed over time,” he said. “To get this thing done in that amount of time, and to get the banking union and the SSM started, this is all they could do.”
Writing by Eva Taylor in Frankfurt; Editing by Ruth Pitchford