ECB will give Eurozone banks just two weeks to devise plan to get their houses in order

 
Nassos Stylianou
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Eurozone banks will come under the microscope (Source: Getty)

The European Central Bank (ECB) will give Eurozone lenders just two weeks to come up with plans to deal with any capital shortfalls after it completes a review of the currency union's most important banks this autumn.

In an update of its plans as it prepares to conduct stress tests of the Eurozone's 128 largest lenders, the Frankfurt-based institution has said that the final results will be given to banks 48 hours before they are published, some time in the second half of October.

The ECB will study the quality of their assets and to make sure they have enough capital, with banks then given 14 days to come up with a proposal to plug any gaps in their balance sheets that are to be reported.

Bank finances will come under the microscope under both a baseline and a worst case scenario and lenders will have half a year to deal with any deficits in the baseline case and nine months in the adverse case.

The necessary capital ratio will stand at eight per cent and the tests are intended to ensure this is both sufficient and suitably distributed to keep banks from failing.

There have been fears that because banks have been so focused on performing well in the review, which will be based on their positions at the end of 2013, that they had been holding back lending.

When it announced the plans last year, the ECB has said that the tests will be conducted to restore or strengthen private sector confidence in the soundness of the banks and in the quality of their balance sheets, but central bank boss Mario Draghi has warned banks in the past that he is not afraid to fail them if they do not meet the targets.

"The ECB has been very transparent in engaging with banks and aims to provide as many details as possible to markets and other participants on progress in the comprehensive assessment and what the end of the process will look like," said Danièle Nouy, chair of the ECB's supervisory board.

The central bank will also release a raft of data on individual banks, making extensive disclosures about bank portfolios.

This, the ECB hopes, should enable analysts and investors to make more meaningful comparisons between the state of banks' loan books, something they have expressed displeasure about being unable to do in the past.

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