EU could introduce tougher stress tests for the banking sector as a result of an initiative supported by several eurozone countries, hoping the cleaning of credit institutions from toxic assets would help them to resume lending and supporting the economy.
The initiative comes from several officials in Brussels and the European Central Bank (ECB), which will conduct more stringent stress tests before ECB’s taking over in 2014 of the banking supervision in the euro zone, said four European officials familiar with the situation.
The plan is backed by rich eurozone countries such as Germany, the Netherlands and Finland, who do not want to cover the bill for poor credit institutions in other European countries. Proponents of tougher stress tests will launch a campaign to persuade other European partners at the meeting of EU finance ministers in Ireland.
Attempts to cleanse the banks from toxic assets and increase their capital reserves face formidable challenges, notes the Wall Street Journal. Conditions of previous stress tests have been relaxed because many euro area governments did not have the willingness and financial resources necessary to handle the results. Even now key partners such as the European Commission and the ECB have not decided how tough the new tests should be.
A group of leading European officials, involved in efforts to stabilize the bloc’s crisis, consider that cleaning the banks from toxic assets is the only way to bring Europe’s economy to growing again. Record low interest rates and massive liquidity introduced by the ECB on the banking market did not provide the desired results.
Proponents of stricter stress tests consider switching to a centralized banking supervision by ECB as a unique opportunity for a new beginning in the banking system.
Eurozone countries promised that, with the takeover of banking supervision by the ECB, the eurozone emergency fund will directly recapitalize troubled banks, so that countries with stronger finances will bear some responsibility for the problems of their neighbors.
During an initial discussion last week, officials from the finance ministries of rich countries such as Germany, the Netherlands, Finland and Austria demanded a higher level of bank capital before their entry under the supervision of the ECB, said one of the participants. Those countries prefer for banks to hold capital reserves equivalent to at least 9% of risk-weighted assets.
Representatives of economically weaker countries such as Spain, Portugal and Italy wanted a lower threshold of 4.5%, the minimum accepted by the international regulations on capital.
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