European Central Bank Vice President Vitor Constancio said lenders in the region are reducing the risk of failing a balance-sheet review by taking pre-emptive steps to increase capital ratios.
“We estimate that, based only on public information, banks since July last year have strengthened their balance sheets by an amount of 104 billion euros ($144 billion),” Constancio said in an interview with Bloomberg Television in Frankfurt yesterday. “Some of the measures have been really spectacular.”
As an October reckoning with the results of the ECB’s yearlong Comprehensive Assessment looms, lenders from Italy’s Banca Monte dei Paschi di Siena SpA to Austria’s Raiffeisen Bank International AG have announced share sales to boost their ability to withstand losses. That process will lower the number of banks that fail the ECB’s test, Constancio said.
“What we will find out will be less than what it would have been if the banks hadn’t front-loaded,” Constancio said. “We aren’t concerned with that fact because the market is aware of what is going on.”
Lenders in Greece, Italy and Austria are among those who are selling new shares to increase their capital ratios, while others have reduced riskier assets to help pass the test. The ECB has set a required ratio of 8 percent of capital to risk- weighted assets for its asset-quality review and 5.5 percent for the subsequent stress test.
The ECB said yesterday that, of the 128 banks in the assessment, those judged to be lacking capital will have to submit a plan to the central bank and will have as much as nine months to plug the shortfall. The ECB has previously urged executives not to wait until then before improving their capital positions.
Greece’s Eurobank Ergasias SA is the latest euro-area bank to bolster its reserves by selling new shares in a 2.86 billion- euro offer. That follows Raiffeisen’s 2.78 billion-euro sale announced in January, and comes as Monte dei Paschi, the world’s oldest bank, seeks to raise 5 billion euros.
Morgan Stanley estimates that European banks have announced measures to strengthen their capital by about 35 billion euros since last July. Those capital-strengthening measures also included asset sales, according to Huw Van Steenis, a London- based analyst at the bank.
“The banks have been front-loading, preparing for the Comprehensive Assessment in a very significant way,” Constancio said. “Markets are becoming aware of this, as stock prices of European banks have increased a lot. That’s a recognition of the change in the balance-sheet position of the banks.”
The results of the assessment are due before the Frankfurt- based ECB becomes the euro area’s top bank supervisor in November. The European Banking Authority and the ECB yesterday released details of the adverse scenario that lenders must withstand in the stress test to pass.
In the simulated 3-year outlook for the economy, growth in gross domestic product is 7 percentage points lower than the European Union currently forecasts. The shock to the economy includes a rout in global bond markets and a currency crisis in eastern Europe.
“The deviation in what regards the evolution of GDP between the baseline scenario and the adverse scenario is 30 percent higher than in previous EBA exercises,” Constancio said. “That’s a good indicator of the severity of our stress tests.”
Once the ECB becomes responsible for financial oversight, it will be able to mitigate the kinds of imbalances, such as the uncontrolled lending from Europe’s core to the periphery, that helped ignite the sovereign debt crisis, Constancio said.
“This behavior, which involved both creditors and borrowers, cannot go on in the same way because now there will be a European supervisor looking at both at the same time,” he said. Officials must “take a European perspective in supervision, whereas when they’re in their countries they are by law obliged to defend the national interest. That makes a difference.”