European Central Bank to "Stress Test" Major Banks

FRANKFURT, Germany (AP) -- The European Central Bank is launching a review of 128 of the eurozone's biggest banks, a push to restore faith in the financial system -- and lay the groundwork for stronger growth -- after similar studies fell short.

The review will be a key test of the ECB's credibility as it prepares to take over as the European Union's banking supervisor. Previous stress tests carried out in 2009 and 2011 by another agency with more limited powers, the European Banking Authority, cleared several banks that were in need of rescuing soon after.

Europe's delay in dealing with bank troubles contrasts with the swift action by the United States. There, officials moved early to make banks strengthen their financial buffers in the wake of the 2008 collapse of investment bank Lehman Brothers.

The ECB announced Wednesday that its review of Europe's biggest banks will begin next month and take a year. Working with national regulators, ECB officials will take a broad look at the banks' holdings and financial strength. In particular, they will look for hidden losses such as loans to businesses and real estate projects that are unlikely to be repaid.

That check will be followed by a stress test that would simulate bank losses in a sudden economic downturn or financial crisis, conducted along with the European Banking Authority.

At the end, banks could be pushed to repair their finances by raising more capital or selling off risky holdings.

Some banks' troubled finances have made it harder for them to lend to businesses, holding back the economy of the 17 EU countries that use the euro.

Banks that are holding shaky assets, such as bad loans, may be unable or unwilling to find cash to lend to businesses that need credit to expand their operations. They may also be asking for higher interest rates to lend, blunting the ECB's ability to stimulate the economy with lower borrowing costs.

The asset review and stress test need to be done before the ECB takes over as the European Union's banking supervisor next year. The single supervisor is part of a broader effort to strengthen the financial system and prevent a repeat of the debt problems afflicting countries such as Spain and Ireland, where bank bailouts overwhelmed government finances.

Ignazio Angeloni, the ECB official in charge of preparations for the new supervisory role, said that "countless things" would make the ECB review more credible than earlier tests. For one, the ECB will take over as supervisor immediately afterward and will be in a position to follow up.

He said the result would call for "repair where repair is necessary" and won't necessarily include a figure for raising new capital. "It will not be a number. It will be an assessment... It may include numbers," he said.

The ECB's job may be complicated by the fact that Europe does not yet have a single authority to restructure or shore up banks that review identifies as weak. European leaders are still debating how to set up such an authority. If banks cannot raise new capital from private investors, they could turn to their national authorities. Under some circumstances, the eurozone's bailout fund could be used, but the idea has faced stiff political resistance from governments.

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