FRANKFURT, Germany - In Europe, the hunt is on for banks too financially troubled to loan money to an economy that desperately needs investment, growth and jobs.
The European Central Bank, the lead crisis fighter for the 18 countries that use the euro currency, is embarking on an extensive search through the books of the biggest banks. It’s an arcane exercise - but one whose results will affect people’s jobs, businesses and lives. The idea is to restore the system’s ability to lend by weeding out lame banks.
Previous efforts in 2009, 2010 and 2011 - by other European Union offices with fewer powers - didn’t do the job. Some banks passed simulated “stress tests” on paper but needed bailouts soon afterward.
Together with national regulators and the European Banking Authority, the central bank will first go through thousands of files from 128 of Europe’s largest banks to hunt for hidden, soured loans and investments. That will be followed by stress tests that simulate how a bank would fare in a recession or crisis.
Once the verdict is delivered in October, national bank regulators will be asked to push problem banks to raise capital by selling new shares to investors, restricting dividends or by being restructured or bailed out.
However, forcing banks to fix their problems could temporarily destabilize financial markets and cost investors and governments more money.
“The object is, no more doubts about European banks,” said European Central Bank Vice President Vitor Constancio, as he laid out the technical details of the exercise at a news conference Monday with Daniele Nouy, chairman of the central bank’s supervisory board.
He said the review would leave bank finances “totally robust and transparent to all investors.”
This is Europe’s latest try at sorting out the problems in its banking system left from the global financial crisis and Europe’s ensuing turmoil over government debt. The United States tackled its banking troubles earlier, in 2008-09, pushing banks to take new capital from the government. That helped the U.S. recover.
At the height of their debt crisis in 2012, European leaders decided to create a centralized supervisor to oversee banks. The idea was to take regulation away from national officials, who can be overly protective of their domestic financial institutions. They gave the job to the central bank, which now needs a clean slate in the banking industry before its supervisory board takes over the function in November.
Asked about the danger that the central bank might take it too easy on the banks, Constancio said, “We will uphold the reputation of the ECB, we will not put it at risk, and we cannot put it at risk.”
Because so many banks are still in financial trouble, they are not able to lend much to businesses and households. That’s preventing the economy from growing and reducing unemployment, now at 12 percent.
For instance, a bank that has made loans that aren’t being repaid may extend the loan or otherwise take it easy on a struggling borrower in hopes he’ll eventually pay. But that practice means the bank may not have money to make new loans.
In particular, it is small- and medium-sized companies that can’t get the credit they need. Yet it’s those companies that provide about 80 percent of the jobs.
Bad loans are a particular target. The European Central Bank and European Banking Authority say anything that’s more than 90 days overdue will be considered a bad loan, whether the bank has declared it in default or not.
Business, Pages 24 on 02/04/2014