ECB Review of Banks: Outcome of Exercises Should be Credible, says Moody's

The ongoing comprehensive assessment of eurozone banks by the European Central Bank will be fruitful only if the outcome of the computation exercises is credible, Moody's Investors Services has said.

The rating agency also said that the two-week deadline the ECB has given the banks to submit their capital plans is a tough one.

The ECB had earlier disclosed the template that it will use in October to publish the results of its comprehensive assessment of the largest eurozone banks.

The bank also announced that in August it would publish the methodology of how the two parts of the comprehensive assessment, the asset quality review and stress test will be combined.

"Notwithstanding the quality of the process and the technical limitations of the exercise, the assessment will bear fruit only if the outcome of the exercise is considered credible," said Alain Laurin, associate managing director of Moody's Investors Service, in a note.

"Significant capital shortfalls and/or a significant number of banks not passing the test will be the criteria against which the assessment's credibility will be measured," Laurin said.

The ECB's review of 128 banks' balance sheets is considered to be a prelude to the central bank becoming financial supervisor for the eurozone in November.

Details

The reporting template and the methodology fulfil the ECB's commitment to transparency by providing investors with detailed information on the process, methodologies and outcomes of its comprehensive assessment, Moody's noted.

The template for the comprehensive assessment's results will provide granular information on key parameters, but the data to be published in October are not overly detailed, which will make it easier for the ECB to get its main messages across and for investors to digest it, the rating agency said.

The ECB assessment will be based on a definition of non-performing loan exposures, which is not identical across banks and jurisdictions. Also, banks' forbearance might not be fully reflected in non-performing loan exposures, but the comparability of results should not be overly harmed, according to the Moody's note.

Deadline

Referring to the deadline the ECB has given banks to submit their capital plans, Moody's said it is at odds with the central bank's communication of the outcome to the banks.

"It (the two-week deadline) means that banks at risk of failing the comprehensive assessment will not wait until the publication of results to work out a credible plan, which seems a bit at odds with the communication of the outcome to the failed banks, particularly if the capital shortfall is large."

Credit Impact

The ECB decision that the resolution (under the Banking Recovery and Resolution Directive) will not be triggered if public support is needed even though the injection of public funds will be subject to European Union state aid rules is credit positive for senior creditors because it will not activate the bail-in framework, Moody's said.