Last week the ECB announced further details on its upcoming Comprehensive Assessment to be conducted on major eurozone banks ahead of the ECB assuming responsibility for their direct supervision under the Single Supervisory Mechanism.
Fabio Axisa, the partner within PwC’s Assurance practice that leads the firm’s banking practice, commented: “We welcome the ECB’s announcement as the detail it provides will help HSBC Bank Malta plc, Bank of Valletta plc and Deutsche Bank (Malta) Ltd get better prepared for the assessment due to start in November.
“We now have a clearer view on the methodology and timeline, as well as confirmation of the 128 banks in scope for assessment, which is helpful. What is very clear is that banks need to focus on getting prepared now for the impending assessment.”
Burkhard Eckes, banking and capital markets leader at PwC Germany and PwC’s asset quality review leader, as part of PwC’s business responding to the economic crisis in Europe, commented: “We support the ECB’s approach that there will be one single combined result published at the end of the Comprehensive Assessment (made up of a Supervisory Risk Assessment, Asset Quality Review, and Stress Test), and not a piecemeal release of results.
It is critical for the ECB’s Comprehensive Assessment to achieve its goals of increasing transparency
“The ECB has also confirmed that the results and following corrective measures could lead to the possible requirement for changes in a bank’s provisions and a need for recapitalisation, also through profit retention, equity issuance, re-orientation of funding sources, asset separation and sales.
“It is critical for the ECB’s Comprehensive Assessment to achieve its goals of increasing transparency, repairing where necessary and building confidence. A major risk that banks could face at the time of release of the results is the ability of markets to deal effectively with potentially a large number of eurozone institutions seeking to either raise new capital or to sell assets within a short space of time. Under the timetable announced , this could occur during the second half of 2014.
“The new state aid rules on burden sharing which have already come into force aggravate the problem of the urgency to raise capital at the same time. Some of the banks we have spoken to are more inclined to issue hybrids than equity. However, the capital threshold for the stress scenario is still unknown (since the eight per cent applies to the base scenario only).
“Further, some banks say that the risk of being bailed-in as soon as the stress test is performed, makes it much more difficult to issue at a reasonable cost. Banks find it difficult to anticipate and raise capital now because they cannot be sure to set the right trigger without knowing what the capital threshold will be.”