"Only a tough AQR, together with a credible stress test, will restore confidence in the European banking system and thereby overcome the dysfunctional interbank market and reduce the fragmentation of euro-area credit conditions"
- Guntram Wolff and Andre Sapir of the Bruegel research group
Earlier this month the European Parliament has voted in favour of centralized oversight for Europe's banking sector. During a full meeting of the parliament, European authorities approved the plan on bringing around 150 Europe's largest banks under the direct supervision of the European Central Bank that will start in 2014. This decision will be a first step of a three-phase analysis of the institutions coming under ECB umbrella. Though it is a bold step to create a closer banking union, the ECB expressed its concerns investors could be spooked by the implementations of bank balance-sheet reviews and stress tests, until the publication of their results. European authorities will begin with a risk review before proceeding with an analyse of bank's balance sheets, however central bankers are struggling to come up with a solution on how to move through the exercise without publishing any undesired data, particularly for banks that are not strong enough. European banks have already undergone two stress tests since 2010, with eight banks not passing the last round conducted by the European Banking Authority, posting a combined capital shortfall of 2.5 billion euros. ECB Executive Board member Joerg Asmussen already stressed out that upcoming test will be the last chance to restore confidence in European banking system. Nevertheless, the Single Supervisory Mechanism is a crucial step toward a planned banking union that is expected to sever the link between the struggling banks and region's debt crisis.
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