Caution flammable material. The European Central Bank (ECB) has just launched a new kind of health check for a hundred banks in the euro zone, so sensitive that its results must be handled with care: only aggregated data may be revealed at second half of 2019, depending on the decision of the institution.

"Supervisory Priorities"

The individual results of the groups subjected to this exercise will remain confidential. And for good reason. The ECB is trying to find out how long an institution could withstand bank withdrawals from customers' sudden withdrawal. Letting go of the names of the worst students could just trigger such a panic among their customers and cause them to fall!

More specifically, the ECB seeks to verify a bank's ability to survive when it can no longer find short-term financing (neither in the markets, nor with depositors, nor with other banks). "Liquidity risk is one of the top priorities in 2019, notes the ECB, because we have observed cases of constrained liquidity in recent years. "

Ten examples

This is what happened in 2011 to the French-Belgian Dexia, solid on paper (because it had sufficient equity) but in reality fragile, because it depended too much on short-term financing. More recently, the Spanish bank Popular also succumbed after a quick liquidity leak, before being taken back for 1 euro by Santander. In total, the ECB says it was inspired by a dozen real cases to calibrate its examination.

The test is to run until May-June and is similar in part to traditional stress tests, each bank being subject to "hypothetical shocks", more or less severe and spreading over six months.

No cleaver

To make matters worse, the ECB's method limits the bank's ability to react in such a scenario: cut off from its market financing, faced with the mistrust of private customers and businesses, the bank can only count on on these immediately mobilizable resources (collateral …) to hope to bail out.

In addition, the authors of this scenario have predicted that no monetary policy measures – such as the short-term loans currently granted by the ECB to the banks (TLRO) – will come to its aid.

Future "losers", however, do not have to fear chop. The information gathered will only be used by the ECB to better supervise the banks in the region, which will be able to discreetly improve their liquidity base. For a closer look – and more transparency – it will be necessary to wait until 2020, the year foreseen for the next bank stress tests in Europe.

Edouard Lederer