The asset quality review of the major banks in Europe, which also includes the two major banks in Malta, has been completed and after what turned into a round-the-clock ordeal, the industry is now eagerly awaiting the results of this comprehensive exercise.
The Asset Quality Review, more commonly known as the AQR, is a detailed assessment of the banks’ assets and how these compare within the new regulatory regime set by the European Central Bank.
This assessment precedes the taking over of the supervision by the ECB of the major banks in Europe, the Single Supervision Mechanism, which is also an integral part of the European Banking Union.
The AQR kicked off with an internal exercise to identify a significant number of bank accounts which fell within the parameters established by the ECB. “The parameters cover many areas of the business. The ECB and its nominated agents in each country wanted to look at the banks’ relationship with its clients and how these accounts were being operated and what are the major risks of these accounts and how these risks are being mitigated,” sources familiar with the exercise said.
Sources said around 1,000 accounts in each of main banks were checked, and since each account required data on around 600 fields, the work involved – and cost – was considerable.
The review was carried out on 130 banks, which between them cover around 85 per cent of the European economy. The major European banks, still recovering from the intense work of the AQR, now face two more hurdles: the ECB’s stress test and, in a few months’ time, the regular ones carried out by the European Banking Authority.
The outcome will depend a great deal on how adequate earlier provisioning was. Local banks have been quite prudent in the past, particularly when it comes to the provision of credit and the provisioning policies they adopted for impaired lending.
The banking sector, as well as the European governments, will now wait to see what the outcome of this exercise will be. If it turns out that certain banks have to take action to strengthen their provisioning, this might have a negative effect on bank lending as no bank would lend if there were the slightest possibility that this would negatively affect their provisioning.
“We have seen this happening in Italy when the major banks published their results a couple of months ago.
“The President of the ECB, Mario Draghi, wants to restore consumers’ faith in the European banking system and this is the main thrust of the European Banking Union. However, the reality is that rules and regulations which are too strict will affect the banks’ appetite to extend credit – the very thing that the ECB wants to encourage. In fact, it has just made €400 billion available to banks because it wants them to give loans. It will be very interesting to see just how much of that money really flows into the European economy,” the sources said.
However, every cloud has a silver lining. The outcome could also put a lot more pressure on companies to review the way they run their business, in particular with regards to the management of cash flow and shareholders’ funds.
“This has been a concern to banks for some time and the fact that companies, particularly SMEs, may find it more difficult to access funding, may finally push through the message that they should review their financing models.”