Stress tests: ECB could force banks to change risk assessment models

The European Central Bank will press banks to change the models they use to predict losses and take account of its views on asset valuation if the ECB is unhappy with their risk assessment, signalling an aggressive stance in its review of the bloc’s banks.

The ECB is putting the euro zone’s 128 largest banks through a painstaking review of their loan books before becoming their supervisor in November in a bid to force them to come clean on hidden losses and restore investors’ trust in the sector.

Between now and August, teams of national supervisors and auditors will check on average 1,250 credit files per bank – significantly more for larger banks – against common guidelines the ECB published on Tuesday. The total exercise will cover 58 percent of the banks’ assets as weighted by risk.

A test to see how banks will hold up under certain shock scenarios will follow over the summer and all results will be released in October. Estimates of banks’ capital shortfall range from €280bn to as much as €770bn.

The tests are unprecedented in ambition – euro zone banks have never before been measured against common thresholds, such as a single definition of when loans become impaired and many have never had their books interrogated in such detail.

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