Asset Anxiety

In Europe's Banking 'Stress' Test, Jockeying for Position

Not more scenes like this
Stress tests are designed to avoid bank runs like this, in 2013 in Cyprus.
  • Why it matters

    Why it matters

    The success or failure of the ECB’s first stress test of banking health is likely to have a major effect on investor confidence in the European single currency.

  • Facts

    Facts

    • The ECB will publish results of its first “stress test” of euro zone banks in October.
    • In the review, 128 banks, including 24 in Germany, are being scrutinized
    • Banks are pushing the central bank for advance notice of their results.
  • Audio

    Audio

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Less than two months before the European Central Bank publishes its first “stress test’’ on the health of the biggest banks in the euro zone, negotiations are taking place between banks and the regulator over how much advance warning financial institutions will receive of negative, potentially embarrassing findings, according to people familiar with the talks.

At stake is the credibility of financial heavyweights such as Commerzbank, Deutsche Bank and German state regional banks, and also the Frankfurt-based central bank itself, which wants to be seen to be imposing new, effective controls on the financial sector to ward off another currency crisis.

Some banks are asking the ECB to give them the results of the stress test before they are published, the people said, so the banks can take corrective action and appear to be on top of the problem. But such advance notice is problematic because if the ECB provides them with results banks would be legally required to pass those on to shareholders under financial disclosure rules.

The central bank has an interest in showcasing the effectiveness of its new stress test, showing market watchers around the world that its new monitoring has teeth, and is forcing banks to raise more money to meet tougher reserve requirements. If all euro zone banks are able to take corrective action before the results become public, it could undermine the ECB’s test.

“Really from a legal perspective it’s a tricky thing, the outcome of a political decision to create a stress test of this kind,” said Andreas Steck, a lawyer at the firm Linklaters in Frankfurt who specializes in banking supervisory law. Mr. Steck said “careful maneuvering will be required’’ both by the banks and the ECB on the release of the report card results.

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