European Central Bank plans a clean sweep of the region’s banks to put a crisis to rest


The euro sculpture stands in front of the headquarters of the European Central Bank in Frankfurt, Germany. (Michael Probst/AP)

Europe’s banking system has been at center stage in the region’s long economic crisis — the cause of problems in some countries, the victim in others, and a source of tension with U.S. leaders who have argued that a thorough cleansing of bad loans and bad banks is desperately needed.

After three years of acrimony, false starts and recession, that may finally happen as the European Central Bank prepares to take over as the common supervisor of a system now overseen by 17 national regulators.

Like any cautious new boss, the ECB wants to know what it’s about to get, and next week it’s launching what it promises will be a deep study into the nooks and crannies of the 130 or so banks it will soon oversee.

“Before assuming the tasks of single supervisor, we have to be assured that we know the situation of the banks we take,” said Peter Praet, a member of the ECB governing board. “It is key that we go through this balance-sheet assessment exercise. We have to do it fast, but in a credible way.”

The outlines of the ECB’s upcoming “asset quality review” are to be announced next week and will aim to resolve one of Europe’s more intractable problems.

Over the past three years, the region has arranged financial bailouts for four countries, has reorganized itself under crisis conditions that threatened to split apart the euro currency union, and has been forced through a wrenching debate about the state of the continent — who pays for what and how much and how often richer nations should support weaker ones.

The fight over the banks has encapsulated all those themes and more as plans advanced to bring sovereign national regulators under central control in a new banking union.

Ultimately, the aim is to also have a common system for dealing with bank failures so that the entire euro region helps out if a big financial institution goes bust. The lack of central control arguably contributed to Europe’s troubles in recent years — and to the bankruptcies of Cyprus, Ireland and nearly Spain when the banking system’s hidden obligations tumbled onto the books of governments that could not afford the bill.

There is still a lingering suspicion that, particularly after a severe crisis and a drawn-out recession, there may be more bad loans and “zombie” debt in the European system than banks have disclosed and that more capital may be needed.

The International Monetary Fund said last week that financially weak firms owed sizable amounts to banks in the weaker euro-zone countries. Absent a dramatic regional economic recovery, the fund said, that sets the stage for potential problems down the road.

This is a long-standing issue. Two earlier “stress tests,” modeled after studies done by the United States during the peak of its financial crisis, were conducted to determine which banks were healthy and which needed to raise more capital to stay in business. Neither test was considered thorough enough to resolve all the doubts.

Now, the ECB is promising a once-and-for-all assessment that will look hard at the specific loans and assets held by each bank, determine whether they have been accurately assessed in value and performance, and, if it works, restore credibility to a system that is still considered a drag on the region’s economy.

The asset review won’t fix all the problems. There is still a fight ahead on how any problems will be resolved, and whether governments will again be on the hook if banks need more capital and are struggling to raise it privately.

But at least the review could start lifting the cloud.

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