The European Central Bank (ECB) is launching a push to strengthen the eurozone’s banking system and keep troubled financial institutions from holding back the region’s economy.
The bank announced yesterday that a year-long review of 130 of Europe’s biggest banks will begin next month.
The asset review is an effort to check for hidden bank losses such as loans that are unlikely to be repaid. That will be followed by a stress test conducted along with the European Banking Authority that would simulate bank losses in a crisis.
At the end, banks could be pushed to repair their finances by raising more capital.
Troubled finances at some banks have held back the economy of the 17 EU countries that use the euro by making it harder for them to lend to businesses. Banks that have shaky assets — such as bad loans — may be unable to find cash to lend to businesses that need credit to expand their operations.
The review is also aimed at restoring confidence in bank finances so they can borrow money more cheaply themselves — and rely less on the ECB’s emergency credit offerings.
The asset review is a test of the ECB’s credibility.
Previous stress tests carried out by the European Banking Authority cleared many banks — only to see some of them rescuing soon after.
Economists say Europe’s delay in dealing with bank troubles has held back the eurozone economy. Officials in the US, by contrast, moved far quicker in the wake of the 2008 collapse of investment bank Lehman Brothers.
The asset review and stress test are preliminary to the ECB taking over as the EU’s banking supervisor next year. The single supervisor is part of a broader effort to strengthen the banking system and prevent a repeat of the debt problems afflicting countries such as Greece and Portugal.
The ECB’s job may be complicated because Europe does not have a single resolution authority that could carry out the restructuring of troubled banks. European leaders are still debating how to set up such an authority.
For now that job remains in the hands of national authorities who have been seen as too reluctant to take tough measures against their home banks.