ECB wants liquidity included in new stress tests: sources

By Julien Toyer

BRUSSELS (BestGrowthStock) – The European Central Bank is backing the European Commission to include a liquidity criterion in the new round of euro zone bank stress tests next year, but they face opposition from Germany, EU sources said.

EU leaders agreed on a new round of stress tests last week as part of Europe’s efforts to win back confidence of financial markets, but detailed criteria of the tests are to be agreed only in January. The tests themselves are to start in February.

“The ECB is pressing for, like the Commission, a test of liquidity,” one EU source said.

In July, 91 EU banks were tested on how they would cope if lending such as home or commercial property loans turned sour.

But supervisors did not consider the risk of a bank being forced out of business if it struggled to get credit itself or if savers withdrew deposits, both factors that accelerated the demise of some of Ireland’s leading banks.

The July checks, embarked upon after similar U.S. tests were credited with reassuring investors, were meant to do the same in Europe by uncovering hidden problems and forcing weaker lenders to recapitalize.

Initially, news that only seven of 91 failed the test — none of them Irish — received a warm welcome.

But some branded the exercise irrelevant in the months afterwards as Ireland was forced to accept an 85-billion euro bailout mainly to stop its banks from toppling, even though the stress tests did not show anything wrong with them.

A second source said that many countries, including Germany, were still reluctant to accept liquidity tests.

“Nothing is decided yet (on the methodology of the tests). Things are moving slowly. One of the options considered now is to conduct the tests in several stages,” a third source said.

A bank that fails a stress test would likely have to top up its capital to persuade investors and lenders that they can survive should the crisis worsen or bad loans be written off.

Germany’s regional lenders, or landesbanks, are among the worst hit by the crisis and some of the country’s commercial banks — Hypo Real Estate and Commerzbank — count among its biggest European casualties.

Little, however, is known about the full extent of the problems at the country’s landesbanks, which were reluctant to publish the findings in the last round of tests. Some believe this has masked the vulnerability of German banks.

So far Germany has spent little propping up individual banks when compared to what other European countries spent. Instead it relies on the strength of its community savings banks — who most assume are cash rich despite the losses of the landesbanks that they own jointly with local governments — to keep the system afloat with liquidity.

Moody’s, the credit rating agency, warned in April that the reliance of German landesbanks on a system of mutual support for stability, rather than being individually strong “makes German banks more exposed to shocks and contagion risk.”

(Reporting by Julien Toyer)

ECB wants liquidity included in new stress tests: sources