Weak banks need to fail in order for the European Central Banks’ stress tests on lenders to be successful and credible, the new chair of the supervisory arm of the bank Daniele Nouy said. Only "good" banks with strong capital will survive.
“We have to accept that some banks have no future,” Nouy told the Financial Times (FT) in an interview published February 10, 2014. Nouy will serve a five-year term.
The single supervisory mechanism (SSM) is a regulatory body of the EBC that along with the London-based European Banking Authority, will conduct an asset quality review, and the health of 130 banks that hold about 80 percent of all bank assets in the 18-member currency bloc.
The mega-regulator will either close "non-viable" banks and attempt to re-capitalize weak, yet "viable"lending institutions by November 2014, when they take over as the region’s bank regulator and announce the results of the "stress tests".
“I hope that we will be able to resolve to put banks in run-off and not necessarily try to combine bad banks with good banks,” Nouy said.
“I do not have any idea of how many banks have to fail. What I know is that we want to have the highest level of quality,” she told FT.
The ECB will assess a lender’s key risks, including liquidity, leverage and funding, as well as asset quality and the ability of a banks’ balance sheet to resist stress scenarios.
“They may need resolution plans because they have to die in an orderly fashion; that’s very important for financial stability,” Nouy said.