Stress tests, European style
EU said to plan examination of its banking system to determine if it is adequately capitalized.
BRUSSELS (Reuters) -- The European Union will stress test its banking system by September to determine its resilience to the economic downturn and find out if it is adequately capitalized, EU sources and banking supervisors said on Tuesday.
The stress tests will be done by national supervisors according to common guidelines and methodology of the Committee of European Banking Supervisors (CEBS).
But it won't single out banks that need more capital or be made public, supervisors said, a step critics say would keep investors in the dark to some extent about potential problems.
A U.S. stress test of individual banks made public last week was widely seen as helping to give clarity to investors.
"The decision was taken by the EU finance ministers. They decided to ask the Committee of European Banking Supervisors to organize a stress test," one EU source familiar with the ministers' deliberations said.
"But it is not a stress test of individual institutions like the Americans are doing. It is more a highly aggregated stress test, which should show the degree of resilience of the overall EU banking sector," the source said.
"It would show if there are additional capital requirements or if banks are adequately capitalized for the present situation," the source said.
CEBS said it already presented a broad risk assessment of the EU banking sector to the bloc's finance ministries at the end of the first quarter and is in the middle of its second assessment due by September that will also look at the viability of the overall banking system.
"We will link the second assessment with stress tests but we have not planned an EU-wide stress-test that would be aimed at identifying the need for recapitalisation," CEBS Secretary General, Arnoud Vossen, told Reuters.
"The reason is that it's the national responsibility to do stress tests that determine the need for capitalization," Vossen said. The presented outcome will not be on a bank by bank basis and will be confidential, Vossen said.
The United States has tested 19 individual banks to see if their capital was sufficient to withstand any further deterioration of the economic situation and found that 10 of them should boost their capital by an aggregated $74.6 billion.
"The U.S. style does not make sense for the EU as a whole -- national supervisors do that. The U.S. has made their stress tests very high profile because they wanted to force their banks to recapitalise, but in Europe stress tests existed, exist and will continue to exist," a second EU source said.
Bank recapitalisation had already taken place in Europe but supervised on a national basis.
The result of the stress test of the EU banking system is to be ready by September, when the EU's Economic and Financial Committee (EFC) of junior finance ministers and central bankers meets on the stability of the financial sector.
"The EFC has discussed the U.S. exercise. In September, the EFC has what is called the financial stability table, they do that twice a year, it is a huge exercise, a review of the financial services sector, that's why...September," the source said.
The test would provide the EU with its own data on the strength of its banking sector after the International Monetary Fund said on April 24 that while U.S. financial institutions were about half way through their needed write-downs, their euro area counterparts were still lagging.
In its Global Financial Stability Report, the IMF estimated that banks around the globe will need to write down about $2.8 trillion in loans and securities. So far, about one-third of that amount has been written down.
According to the fund, U.S. banks have written down about $510 billion in assets, putting them about halfway through the process of loan loss recognition. A further $550 billion in write-downs are expected over the next two years.
In the euro area, write-downs so far have totaled $154 billion, with another $750 billion expected through 2010. In Britain, bank credit losses have been $110 billion, with another $200 billion likely in 2009-10, the IMF said.
But the European Central Bank and France voiced skepticism over the estimates saying there were methodological issues that needed clarification.
"With regards to Europe, because of the methodology, in our view we do not have an entirely convincing analysis," ECB President Jean-Claude Trichet has said. 
