Draghi’s blunt warning on bank stress tests
Mario Draghi warned on Wednesday night that some European banks needed to fail a series of European Central Bank health checks to prove the credibility of its year-long review of the region’s biggest banks. The blunt comments by the ECB president raised pressure on EU leaders to earmark public money that could in extreme cases be used to recapitalise struggling lenders. The ECB’s assessment, which includes stress tests and balance sheet reviews, is designed to dispel doubts about banks’ financial health before the central bank takes over from national authorities as supervisor in a year’s time. "Banks do need to fail to show its [the assessment’s] credibility," Mr Draghi told Bloomberg Television. "There is no question about that." He went on to note that EU political leaders had made an "explicit commitment to have in place proper, adequate national backstops by the time the exercise is being carried out. We have a commitment at the highest level". While the ECB has said banks that are found wanting capital should first turn to shareholders for fresh funds, there is concern that the lack of agreed public backstops could unsettle financial markets if left unresolved for too long. Germany, however, this month hardened its stance against granting direct access to eurozone rescue funds for troubled banks. It insisted that losses be imposed on bondholders before any taxpayer money comes into play, making it harder to set in place a common safety net for lenders. The grand coalition government that will probably be formed in Berlin is not likely to give ground on the issue. The centre-left Social Democrats share Angela Merkel’s Christian Democratic Union’s opposition to "direct recaps" by the European Stability Mechanism. Bank share prices fell after the ECB unveiled its plans. Italian bank stocks fell by as much as 3 per cent in early trading, reflecting investor concern that the tests would show up unexpected holes in balance sheets. Most other leading banks in Spain, France and Germany saw share prices fall about 2 per cent. As part of the ECB’s assessment, the central bank will conduct an asset quality review of bank balance sheets, leading to a recommendation in a year’s time that may involve demanding some banks bolster their capital reserves. "We expect that this assessment will strengthen private sector confidence in the soundness of the euro area and in the quality of bank balance sheets," Mr Draghi, ECB said in a statement.