The eurozone’s banks are about to get greater insight into the European Central Bank’s landmark review of their books, as national experts and their advisers meet in Frankfurt on Monday to hammer down details of the next phase of the tests.
The ECB is carrying out a wide-ranging review of 128 of the region’s largest banks in an effort to address lingering doubts about their health before it becomes their supervisor in November.
Banks have already been asked for extensive amounts of data on their loan books and trading assets for the ‘Asset Quality Review’ (AQR), but know relatively little about how the ECB will interpret the data and what the methodology of the tests will be.
Three sources familiar with the tests told Reuters that representatives of all 18 eurozone supervisors had been asked by the ECB to the meeting in Frankfurt on Monday to discuss the methodology of the tests and other details of the program’s implementation.
Representatives from the big four accounting firms – KPMG, Deloitte, Ernst & Young and PriceWaterhouse Coopers – who are set to earn a fortune from advising on the tests – will also attend, two of the sources said.
“The so-called execution phase, or in technical terms, AQR phase 2, is about to commence,” one of the sources said, speaking on condition of anonymity as the discussions are not yet public.
Phase two includes going through loan portfolios individually and inspecting the collateral, as well as reviewing the value of hard-to-value assets known as ‘level three’ assets. Its execution will give banks some insights into the ECB’s approach to valuation.
The three sources said national authorities and some of their advisors have already been given an AQR manual, spanning about 250 pages, on the methodology. Two of the sources said the manual’s recipients have been asked to sign confidentiality agreements on its contents.
The ECB declined to comment on the manual or Monday’s meetings.
Banks and investors across the eurozone are intensely monitoring the progress of the asset quality review, since it could have a major impact of on the valuation of individual banks and the sector as a whole.
European banks trade at a significant discount to their U.S. peers, something that some policymakers attribute to remaining doubts about whether the banks have acknowledged bad loans or other problems they may be harboring.
Individual banks could be forced to raise capital if they are found to have over-valued their assets, with one estimate suggesting the EU-wide stress tests – which the ECB exercise feeds into – could reveal a trillion dollar capital shortfall.
(This story has been fixed to corrects the final paragraph to read trillion dollar shortfall instead of billion dollar)
