FRANKFURT – A top European Central Bank official is calling for a “strict and thorough” review of bank finances before the ECB takes over from national regulators as Europe’s top financial supervisor.
Jens Weidmann said in an interview published Tuesday on the website of the Sueddeutsche Zeitung daily that a “tough, thorough review is unavoidable in order to avoid unpleasant surprises later.”
He said that if the review shows banks need more money, the capital should come primarily from the governments of the countries where the banks are located.
Weidmann sits on the ECB’s 23-member rate-setting council by virtue of his post as head of the Bundesbank, Germany’s national central bank. He has only one vote, but added clout because he comes from the eurozone’s largest country. Germany’s support is key for any eurozone rescue measures.
The ECB will review the quality of the loans and investments that Europe’s larger banks have made and are holding as assets on their balance sheet. The review will be followed by stress tests from the European Banking Authority. Those will estimate the losses banks would suffer in case of financial turmoil or a deeper economic downturn.
Banks whose finances are found to be shaky could be pushed to raise more capital as a financial buffer.
Troubled banks have been a key factor in Europe’s 3 1/2 years of financial and economic difficulties stemming from too much government debt. The ECB says many smaller companies can’t get credit because some banks’ own finances are strained. That has held back the 17-country eurozone’s economy, which is in recession. Economic growth is the surest way to reduce excessive debt burdens over the long term.
Banks that need to raise more capital can seek it from equity investors, or sell off risky investments so their existing capital is enough to cover potential losses. European leaders have agreed that 60 billion euros ($78.5 billion) from the eurozone’s bailout fund could also be used to recapitalize banks.