Now chairman of UBS, Weber says: "I think well see new problems in Europe as the [ECBs] asset quality review (AQR) and stress test is playing out, largely because there will be a point in time when markets start to ask what is the likely outcome for each of the 130 financial institutions involved. And unfortunately there are many ways to speculate on those outcomes, such as shortening the stock or selling long positions." It is widely assumed that the ECB, in its de facto first act as lead regulator of Europes most important banks before de jure taking on that role next November, cannot afford to blow its credibility. If it does so, that would likely impair its reputation as a monetary authority. And it is hard to see how the stress tests, the final step in the three-part review the ECB will undertake next year, can be credible without some banks failing them. Second stepMuch attention has focused on the second step: the ECBs asset quality review, looking at banks likely NPL levels and current provisioning, their collateral security against potential problem assets and capital resources. But before this, the ECB will also assess banks leverage, liquidity and funding before finally finishing with the stress test itself. It will be interesting to see how the ECB assesses the fact that there are large swathes of the European banking system where the ECB itself is the key provider of funding against diverse pools of loan collateral that banks have parcelled up and submitted as security for cash.
|Axel Weber, UBS|
Meanwhile, Barclays economists, led by Philippe Guding, see broader risks to the European economy if banks hunker down during the review. We think the timing of the AQR and stress tests remains a material risk for 2014. The risk of seeing the ongoing economic recovery foundering on a credit constraint due to the unwillingness of banks to expand their holdings of risky assets at the time of the banks comprehensive assessment remains high.