By STEPHEN CASTLE and JACK EWING
Published: June 17, 2010
BRUSSELS — The European Union agreed Thursday to publish the results of stress tests imposed on major, cross-border banks, a move aimed at restoring confidence in the health of the bloc’s financial sector.
The move would be accompanied by a pledge to show flexibility in applying rules limiting government aid to companies, according to an agreement reached at a summit meeting of E.U. leaders in Brussels.
That would allow European governments to move to recapitalize any banks deemed to be in trouble — before the publication of the stress-test results.
Herman Van Rompuy, president of the European Council, confirmed the agreement, and said the stress test results would be published before the end of July.
“I think it’s good news,” said Nicolas Véron, an economist at Breugel, a research organization in Brussels. “Nations have come to the realization they couldn’t go on telling people everything was fine and giving no evidence.”
But the effect could be less reassuring than hoped. Mr. Van Rompuy said the agreement would apply “around 25” systemically important banks.
That means they would not shed light on the financial health of the hundreds of smaller savings or public-sector institutions which dominate the retail banking market in countries like Germany.
Those institutions, which fall under the jurisdiction of national authorities, are often fiercely opposed to attempts to force more disclosure. “Making stress tests public is counterproductive and could in certain cases lead to misperceptions in markets,” Karl-Heinz Boos, director of the Association of German Public Sector Banks, said in a statement.
Yet lingering doubts about their strength could even add to market pressures on some countries.
The draft text prepared by the European Commission president, José Manuel Barroso, called for publication of the test results on a “bank-by-bank basis” and pledged “sufficient flexibility” over E.U. state aid rules, to deal with any problems detected in a “timely manner.”
In effect, that would mean the European Commission waiving its strict rules on state aid, which are meant to guarantee a level playing field for companies across the 27-nation single market.
The text also made it clear that any bank recapitalization would be undertaken by national governments and not as part of a broader E.U. safety net for countries already struggling to deal with their massive debt.
The Europeans were hoping to go to a Group of 20 meeting in Toronto next week with a clear position on the transparency of stress test results.
Stress tests are designed to estimate the potential losses financial institutions could be facing under adverse circumstances, and therefore to prompt corrective action if appropriate.
The debate on publication of results resumed this week when Spain, which faces a lack of market confidence, promised to publish the results of its stress tests in a bid to calm investor worries. Germany indicated it, too, was in favor of more transparency.
But Mr. Boos at the Association of German Public Sector Banks said that stress tests could only be made public with permission of the banks, which none have given. The association represents banks accounting for about a quarter of the German market, including the state-owned Landesbanks which in several cases have already required multi-billion euro bailouts because of investments in securities tied to the U.S. subprime market and other toxic assets.
Mr. Véron predicted that evaluations of the large banks, along with plans by Spanish authorities to disclose results of their tests of domestic banks, will force other countries to follow suit and disclose the financial state of smaller institutions. “Once you have a benchmark for the first 25 banks, then this will have trigger effects,” he said.
One big risk is that some banks will prove to be weaker than has been publicly known, or even insolvent once forced to do a frank evaluation of their financial state. “It could be there will be some delicate moments in the process,” Mr. Véron said. “But it’s much better than the stonewalling we have had.”
French and German banks are the most exposed to debt from Spain, Greece, Portugal and Ireland, according to a report released Monday. French banks had lent $493 billion to businesses, households and governments in the four countries by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central banks.
Jack Ewing reported from Frankfurt.
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Source: http://www.nytimes.com/2010/06/18/business/global/18stress.html?src=busln
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Published: June 17, 2010
BRUSSELS — The European Union agreed Thursday to publish the results of stress tests imposed on major, cross-border banks, a move aimed at restoring confidence in the health of the bloc’s financial sector.
The move would be accompanied by a pledge to show flexibility in applying rules limiting government aid to companies, according to an agreement reached at a summit meeting of E.U. leaders in Brussels.
That would allow European governments to move to recapitalize any banks deemed to be in trouble — before the publication of the stress-test results.
Herman Van Rompuy, president of the European Council, confirmed the agreement, and said the stress test results would be published before the end of July.
“I think it’s good news,” said Nicolas Véron, an economist at Breugel, a research organization in Brussels. “Nations have come to the realization they couldn’t go on telling people everything was fine and giving no evidence.”
But the effect could be less reassuring than hoped. Mr. Van Rompuy said the agreement would apply “around 25” systemically important banks.
That means they would not shed light on the financial health of the hundreds of smaller savings or public-sector institutions which dominate the retail banking market in countries like Germany.
Those institutions, which fall under the jurisdiction of national authorities, are often fiercely opposed to attempts to force more disclosure. “Making stress tests public is counterproductive and could in certain cases lead to misperceptions in markets,” Karl-Heinz Boos, director of the Association of German Public Sector Banks, said in a statement.
Yet lingering doubts about their strength could even add to market pressures on some countries.
The draft text prepared by the European Commission president, José Manuel Barroso, called for publication of the test results on a “bank-by-bank basis” and pledged “sufficient flexibility” over E.U. state aid rules, to deal with any problems detected in a “timely manner.”
In effect, that would mean the European Commission waiving its strict rules on state aid, which are meant to guarantee a level playing field for companies across the 27-nation single market.
The text also made it clear that any bank recapitalization would be undertaken by national governments and not as part of a broader E.U. safety net for countries already struggling to deal with their massive debt.
The Europeans were hoping to go to a Group of 20 meeting in Toronto next week with a clear position on the transparency of stress test results.
Stress tests are designed to estimate the potential losses financial institutions could be facing under adverse circumstances, and therefore to prompt corrective action if appropriate.
The debate on publication of results resumed this week when Spain, which faces a lack of market confidence, promised to publish the results of its stress tests in a bid to calm investor worries. Germany indicated it, too, was in favor of more transparency.
But Mr. Boos at the Association of German Public Sector Banks said that stress tests could only be made public with permission of the banks, which none have given. The association represents banks accounting for about a quarter of the German market, including the state-owned Landesbanks which in several cases have already required multi-billion euro bailouts because of investments in securities tied to the U.S. subprime market and other toxic assets.
Mr. Véron predicted that evaluations of the large banks, along with plans by Spanish authorities to disclose results of their tests of domestic banks, will force other countries to follow suit and disclose the financial state of smaller institutions. “Once you have a benchmark for the first 25 banks, then this will have trigger effects,” he said.
One big risk is that some banks will prove to be weaker than has been publicly known, or even insolvent once forced to do a frank evaluation of their financial state. “It could be there will be some delicate moments in the process,” Mr. Véron said. “But it’s much better than the stonewalling we have had.”
French and German banks are the most exposed to debt from Spain, Greece, Portugal and Ireland, according to a report released Monday. French banks had lent $493 billion to businesses, households and governments in the four countries by the end of 2009 while German banks had lent $465 billion, according to the report by the Bank for International Settlements, an institution based in Basel, Switzerland, that acts as a clearing house for the world’s central banks.
Jack Ewing reported from Frankfurt.
.
Source: http://www.nytimes.com/2010/06/18/business/global/18stress.html?src=busln
.
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