The euro zone’s grand plan to clean up its banks could falter be¬cause the Euro¬pean Central Bank lacks the power to force bankers, constrained by accounting rules, to accept regulators’ view of the risks on their books.
The plan aims to give the ECB a ‘clean sheet’ when it takes over regulation of the euro zone’s lenders in No-vember and also to restore investor confidence in the banks which are still valued below their U.S. peers more than five years on from the financial crisis. []
The ECB is assessing if banks in the 18-country euro zone have enough capi¬tal to support their business.
Its Asset Quality Re¬view (AQR) of 130 of the euro zone’s largest banks’ books is already under way ahead of stress tests later in the year. The AQR checks whether banks are current¬ly adequately capitalised, while the stress tests look at whether they can survive a future crisis. Estimates of the banks’ total capital shortfall have been as high as $1 trillion.
But accountants, bankers and regulators said the AQR could stumble on legal and accounting issues beyond the scope of the ECB’s pow¬ers.
Banks have a legal re¬sponsibility to value their own assets in accordance with international account¬ing rules and cannot simply plug the ECB’s valuations into their balance sheets.
“The ECB is powerful, but it cannot undo a hundred years of company law,” one supervisory source said, speaking on the condition on anonymity since these matters are sensitive.
Banks will still need enough capital to cover the loan-book risks identified by the ECB but the AQR’s aim of increasing transparency and investor confidence might fall by the wayside.
The debate is already being played out in Ireland, where Bank of Ireland said it disagreed with some of the values produced by its central bank’s Balance Sheet Assessment exercise in late 2013. In Slovenia, a senior bank executive said his bank would not change its end-2014 balance sheets to reflect the findings of an asset review.
“It’s clearly a sensitive area, apart from Spain we haven’t really seen bank¬ing regulators get involved in the accounting process across Europe,” Tony Clif¬ford, partner in financial services at accountancy firm Ernst & Young, said. In pre-crisis Spain, regula¬tors tried to get banks to set aside extra provisions on top those required by account-ing rules.
