For instance, a bank that has made loans that aren’t being repaid may extend the loan or otherwise take it easy on a struggling borrower in hopes they’ll eventually pay. But that practice means the bank may not have money to make new loans.
In particular, it is small- and medium-sized companies that can’t get the credit they need. Yet it’s those companies that provide some 80 percent of the jobs.
Bad loans are a particular target. The ECB and EBA say anything that’s more than 90 days overdue will be considered a bad loan, whether the bank has declared it in default or not.
THERE WILL BE BLOOD
ECB President Mario Draghi has said banks “do need to fail” to underline the exercise’s credibility.
If a bank can’t find more capital from its shareholders, it might have to turn to its government for taxpayers’ money. Or, the government itself could turn to the eurozone’s taxpayer-backed bailout fund — though political opposition to that is high. The 2011 stress test of 90 banks found eight needed to raise 2.5 billion euros in capital, but noted that banks had scrambled to raise 50 billion euros just ahead of the test.
Analyst Nicolas Veron, who splits his time between Brussels think tank Bruegel and the Peterson Institute for International Economics in Washington, says it’s difficult to tell how much capital is needed or how many banks might fail. Some banks have already started raising capital ahead of time.
The ECB test — formally called the asset quality review, or AQR — “is about killing the zombie banks,” he said.
“The AQR is there to identify them — and to kill them.”