Europe is embarking on a new attempt to pull its banks out of the molasses of its debt crisis, hoping an aggressive cleanup of toxic assets will get banks to lend again and kick-start its sputtering economies.
The push is being led by several key officials in Brussels and Frankfurt, who want to see a new round of much-tougher stress tests before the European Central Bank becomes the euro zone's main banking policeman next year, according to four officials familiar the talks.
They are backed by the continent's richer countries, including Germany, the Netherlands and Finland, which don't want to pick up the bill for weak lenders in their poorer neighbors.
The proponents of strict stress tests will launch their campaign at a Dublin meeting of European Union finance ministers Friday. That debate follows a first discussion of the exercise among senior national finance-ministry officials last week.
Efforts to rid banks of bad assets and then boost their capital buffers face formidable challenges: Previous stress tests have been watered down as national governments lacked the willingness and financial capacity to deal with the results. Even now, officials caution that key players -- including the ECB and the European Commission, the EU's executive -- haven't made up their minds on how intrusive they want new stress tests to be.
But a group of key crisis managers believes cleaning up weak banks is the only way to get Europe's economy to grow again, after superlow interest rates and large-scale liquidity injections from the ECB have failed to produce the desired results. These officials see continued doubts over the health of many lenders as the main reason banks are reluctant to lend to companies, especially in the continent's weaker countries.
The proponents of aggressive stress tests see a planned move to more powerful and centralized supervision under the auspices of the ECB as a unique chance to clean the slate. The ECB is supposed to start policing banks in the euro zone, and in other EU countries that want to join the new supervisory regime, in July 2014. The legislation that gives the ECB the new powers sees a so-called asset-quality review giving the central bank a chance to examine the financial state of the banks it is taking on. It is this review that is at the center of the push for intrusive stress tests.
Once the ECB has taken on supervision, the euro zone has promised to let its bailout fund recapitalize weak banks directly, meaning richer states will take on some of the responsibility for their neighbors' problems. Losses revealed in the asset-quality review, however, would still have to be covered nationally.
In an initial discussion last week, senior finance-ministry officials from richer countries such as Germany, the Netherlands, Finland and Austria called for a high capital threshold for banks before they come under ECB supervision, said an official involved in the talks. This person said that these countries' officials preferred that banks be required to have common equity at least equivalent to 9% of risk-weighted assets.
The initial support from powerful rich states has made proponents of strict stress tests optimistic they may succeed this time. But Germany and others have raised last-minute objections to tough stress-test scenarios in the past.
The debate over tougher stress tests comes as Europe is in the middle of a broader overhaul of its strategy for dealing with sick banks. Last month, the euro zone for the first time forced losses on depositors and senior bond holders in two Cypriot lenders, while some creditors have been hit when banks were closed or downsized in other countries.
