ECB To Allow 2 Weeks For Banks To Submit Capital Plans

(RTTNews) - The European Central Bank said it will publish the results of its asset review and stress tests of banks late October and will allow two weeks for banks with capital shortfalls to plan remedial measures for the same.

The Frankfurt-based central bank on Thursday published an update of its thorough review, known as the comprehensive assessment, of the 128 largest banks' balance sheets, an exercise undertaken ahead of the ECB taking charge as the banking supervisor under the Single Supervisory Mechanism in November.

"As we finalize this tough and rigorous exercise, we are doing our utmost to prepare for a smooth disclosure process," Daniele Nouy, chair of the supervisory board, said.

The ECB plans to merge the asset quality review (AQR) findings of banks into the stress test and these would be used to adjust the starting point of the latter. The central bank will publish the join-up methodology in the first half of August.

"Upon publication of the results in the second half of October 2014, banks facing a capital shortfall will be requested to submit capital plans within a period of two weeks, which will then be evaluated by the Single Supervisory Mechanism (SSM)," the ECB said.

The ECB-led SSM Joint Supervisory Teams will closely track the implementation of these plans as of November 4. Banks will be expected to plug the gap in their capital, determined based on the AQR or the different scenarios of the stress test, within six months. Further, shortfalls arising from the adverse scenario must be dealt with in nine months.

"The overall amount of capital to be raised by a bank will be the maximum of the shortfall under the AQR, the baseline scenario and the adverse scenario of the stress test, whenever it appears over the three-year horizon," the ECB said.

Banks have already submitted the bottom-up stress test results to the ECB, the national regulators and the European Banking Authority. These are being checked for quality and the process will continue until early September, after which the join-up will occur.

Further, the comprehensive assessment will also include an overview of major capital measures taken by the banks between January 1 and September 30.

"This information provides an indication of those changes in the bank's capital position over this period that are not reflected in the calculation of the potential capital shortfall, as at 31 December 2013, identified in the comprehensive assessment, but that have direct implications for its coverage," the ECB said.

Supervisors and banks are set to intensify their interactions regarding the assessment over the coming months until the communication of the review results in October. Banks would be asked not to disclose any findings communicated to them during this process, as they will be deemed "partial and preliminary".

"Banks will be informed of the comprehensive assessment results very close to the time of public disclosure in order to avoid an untimely and disorderly publication of the results," the ECB said.

The ECB said that banks will be allowed to propose that capital shortfalls arising solely from the AQR may be offset by retained earnings from 2014. The regulator also stressed that the first port of call to address capital shortfalls is private sources.

Public recapitalization can be considered only in exceptional circumstances such as where it is seen strictly necessary to remedy a serious disturbance in the economy of a Member State and to preserve financial stability, the central bank said.

"From January 2015, the use of public funds would imply that an institution is deemed to be failing, or likely to fail, and would lead to resolution, except for precautionary public recapitalizations that meet all the conditions of the Bank Recovery and Resolution Directive (BRRD)," the ECB added.

"These precautionary recapitalizations will not trigger resolution,and will be conditional on final approval under state aid rules, including the presentation of a restructuring plan and burden-sharing, thus ensuring a level playing field."