Europe's banking watchdog has edged closer to the United States in a check up of its banks this year and is keen to go further still to increase its influence over how banks behave, including how much they pay staff or shareholders.
Previous European bank health checks since the financial crisis failed to restore confidence in an industry where many banks were rescued by taxpayers. But in the United States, regulators have been praised for stepping in early to recapitalise banks and they now have the clout to keep bank chiefs on their toes.
"What the U.S. has been able to do successfully is in 2009 people were looking for blood on the floor immediately and were focused on who passed and who failed," said Piers Haben, director of oversight at the European Banking Authority, which runs Europe's tests.
"They've managed to transform that so people are now much more focused on forward capital plans," he said. "It is now much more about 'what's your dividend policy?' or 'what's your bonus policy?' and 'what's your pathway?' That's a very important feat the U.S. has managed to achieve," Haben said at this week's Reuters Financial Regulation Summit.
The U.S. Federal Reserve has stepped in the way of big banks several times. This week it told Bank of Americato suspend raising dividends and buying back shares after the country's second biggest bank miscalculated its capital, sending its shares tumbling.
Europe's latest test, unveiled on Tuesday, can force banks to raise equity to improve capital and also gives supervisors a bigger toolkit to deal with any weaklings.
European regulators have made several trips across the Atlantic to learn lessons from the more established U.S. process, and some have privately said they were surprised at the level of rigour there.
Europe could also learn from the more flexible approach to capital levels and testing in the United States, Christian Clausen, chief executive of Sweden's Nordea, said.
"They put in a lot of capital on day one and Europe didn't do that. And they put in a lot of restrictions and then lowered them, and have replaced it with a stress test regime. That is a smart way to do it, rather than keep raising the bar," Clausen said at the Reuters Summit.
When Europe's test results are released in October it is not expected to lead to a huge capital raising. [ID:nL6N0MZ0YQ] Analysts say Deutsche Bankmay raise equity in advance of the results and some smaller banks may need cash.
Banks have already boosted capital by about 35 billion euros
($48.5 billion) and taken bigger provisions on loans in advance of the test, according to analysts at Morgan Stanley.
In Britain, where big banks will go through the European health check and also a parallel domestic test, the regulator can limit pay for shareholders and staff and even force banks to change executives. The EBA has said other national supervisors have extra powers, although it has declined to specify them.
With the European Central Bank taking over supervision of all euro zone banks there will be greater consistency on dealing with banks that fail, and the ECB is already forcing banks to assess the quality of assets before the health check starts.
PAST FLAWS
Europe's tests in 2009, 2010 and 2011 foundered as a disjointed political and regulatory landscape was exacerbated by economic crisis in many countries. Europe also tests a much bigger number of banks - 124 this year, compared with 30 in the United States.
The Fed's test, known as a comprehensive capital analysis and review (CCAR), has been criticised for lack of transparency on its methodology and its decisions can seem arbitrary.
The aim of the tests is to assess banks' ability to withstand recessions, spikes in unemployment, falls in house prices and other factors. The most adverse scenario the Fed inflicts on banks is seen as harsher than the EBA's test.
But other factors - notably Europe's insistence that banks use a 'static balance sheet' that does not allow adjustments for asset sales or other remedial action in a crisis - make comparisons about test severity difficult.
What is more significant is how the U.S. testing process has evolved so it has become a key part of executives' planning and strategy, industry sources said.
"Over the last five years the CCAR process has had a very strong effect on the banks in the U.S. in terms of the discipline to the approach and the resources they apply, which are much greater than typically applied in Europe," Richard Barfield, a director in PwC's risk and regulation practice, said. "All those qualitative aspects of the process have moved on from the starting point."
Almost 90 percent of European banks had less than 20 people dedicated to stress testing, according to a survey by PwC in January, whereas core teams in some U.S. banks included 40-70 people, and one big bank estimated it had 500 people involved.
The Fed's test takes place every year to a set timetable.
"There is a value to routine," the EBA's Haben acknowledged. Europe's banks will conduct annual national tests, but he said no decision had been taken on whether that should be done across the European Union.
Source: Reuters
Previous European bank health checks since the financial crisis failed to restore confidence in an industry where many banks were rescued by taxpayers. But in the United States, regulators have been praised for stepping in early to recapitalise banks and they now have the clout to keep bank chiefs on their toes.
"What the U.S. has been able to do successfully is in 2009 people were looking for blood on the floor immediately and were focused on who passed and who failed," said Piers Haben, director of oversight at the European Banking Authority, which runs Europe's tests.
"They've managed to transform that so people are now much more focused on forward capital plans," he said. "It is now much more about 'what's your dividend policy?' or 'what's your bonus policy?' and 'what's your pathway?' That's a very important feat the U.S. has managed to achieve," Haben said at this week's Reuters Financial Regulation Summit.
The U.S. Federal Reserve has stepped in the way of big banks several times. This week it told Bank of America
Europe's latest test, unveiled on Tuesday, can force banks to raise equity to improve capital and also gives supervisors a bigger toolkit to deal with any weaklings.
European regulators have made several trips across the Atlantic to learn lessons from the more established U.S. process, and some have privately said they were surprised at the level of rigour there.
Europe could also learn from the more flexible approach to capital levels and testing in the United States, Christian Clausen, chief executive of Sweden's Nordea
"They put in a lot of capital on day one and Europe didn't do that. And they put in a lot of restrictions and then lowered them, and have replaced it with a stress test regime. That is a smart way to do it, rather than keep raising the bar," Clausen said at the Reuters Summit.
When Europe's test results are released in October it is not expected to lead to a huge capital raising. [ID:nL6N0MZ0YQ] Analysts say Deutsche Bank
Banks have already boosted capital by about 35 billion euros
($48.5 billion) and taken bigger provisions on loans in advance of the test, according to analysts at Morgan Stanley.
In Britain, where big banks will go through the European health check and also a parallel domestic test, the regulator can limit pay for shareholders and staff and even force banks to change executives. The EBA has said other national supervisors have extra powers, although it has declined to specify them.
With the European Central Bank taking over supervision of all euro zone banks there will be greater consistency on dealing with banks that fail, and the ECB is already forcing banks to assess the quality of assets before the health check starts.
PAST FLAWS
Europe's tests in 2009, 2010 and 2011 foundered as a disjointed political and regulatory landscape was exacerbated by economic crisis in many countries. Europe also tests a much bigger number of banks - 124 this year, compared with 30 in the United States.
The Fed's test, known as a comprehensive capital analysis and review (CCAR), has been criticised for lack of transparency on its methodology and its decisions can seem arbitrary.
The aim of the tests is to assess banks' ability to withstand recessions, spikes in unemployment, falls in house prices and other factors. The most adverse scenario the Fed inflicts on banks is seen as harsher than the EBA's test.
But other factors - notably Europe's insistence that banks use a 'static balance sheet' that does not allow adjustments for asset sales or other remedial action in a crisis - make comparisons about test severity difficult.
What is more significant is how the U.S. testing process has evolved so it has become a key part of executives' planning and strategy, industry sources said.
"Over the last five years the CCAR process has had a very strong effect on the banks in the U.S. in terms of the discipline to the approach and the resources they apply, which are much greater than typically applied in Europe," Richard Barfield, a director in PwC's risk and regulation practice, said. "All those qualitative aspects of the process have moved on from the starting point."
Almost 90 percent of European banks had less than 20 people dedicated to stress testing, according to a survey by PwC in January, whereas core teams in some U.S. banks included 40-70 people, and one big bank estimated it had 500 people involved.
The Fed's test takes place every year to a set timetable.
"There is a value to routine," the EBA's Haben acknowledged. Europe's banks will conduct annual national tests, but he said no decision had been taken on whether that should be done across the European Union.
