"That's because we already recognize weaknesses in capital and asset quality in current ratings, and because we would expect some banks to adjust regulatory capital positions before the October 2014 announcement of results," Standard & Poor's credit analyst Osman Sattar said in the report, "S&P Expects That The ECB's Review Of Eurozone Banks Will Have A Limited Impact On Ratings."

In an historic shift in how eurozone banks are supervised, the European Central Bank (ECB) is preparing to assume direct regulatory responsibility in November 2014 for banks in the region. To start with a clean slate, the ECB is conducting a three-part "comprehensive assessment" of the banks: a review of key risks including liquidity, leverage, and funding; an asset quality review (AQR); and a stress test.

We expect the ECB's assessment in 2014 to be more rigorous than the European Banking Authority's stress test in 2011 because of the ECB's greater independence and its new mandate as the single supervisory body for about 130 banks representing about 85% of banking assets in the eurozone.

The ECB has listed 124 banks that are likely to be subject to its assessment. We rate 79 of these banks and our ratings currently consider that more than half of them have a rating weakness in our assessment of their capital strength or asset quality. This relative ratings weakness, in our view, is more bank-specific than country-specific as there are banks of varying strength in each country. In the report we group rated banks subject to the ECB's assessment by country and our view of the combined impact of capital and earnings and risk position on current ratings.

The ECB's supervisory risk assessment will review key risks facing banks including those to liquidity, leverage, and funding. We have seen improvements in funding and liquidity for Europe's largest banks in recent years, but in our view they still have a long way to go to narrow funding gaps. (See "Western Europe's Top 50 Banks Still Have A Long Way To Go To Fill The Funding Void," Oct. 21, 2013).

The ECB will be keen to start its supervisory responsibilities in November 2014 with banks that have the trust of investors and other stakeholders, and are either already well-capitalized or have a clear path toward that end. Well-capitalized banks that are trusted by stakeholders would also be in a much better position to support economic recovery. The ECB's comprehensive assessment is a welcome and necessary step toward achieving these outcomes. In our view, the keys to success are greater transparency about banks' asset quality, and balance sheet repair supported by credible backstops where necessary.

"Credible backstops and plans for corrective actions are critical for supporting confidence in the eurozone. Senior creditors of banks that fail the ECB's asset quality review or stress test would unlikely face losses, in our view, but shareholders and some subordinated creditors could," Mr. Sattar concluded.

Standard & Poor's Ratings Services, part of McGraw Hill Financial (NYSE: MHFI), is the world's leading provider of independent credit risk research and benchmarks. We publish more than a million credit ratings on debt issued by sovereign, municipal, corporate and financial sector entities. With over 1,400 credit analysts in 23 countries, and more than 150 years' experience of assessing credit risk, we offer a unique combination of global coverage and local insight. Our research and opinions about relative credit risk provide market participants with information and independent benchmarks that help to support the growth of transparent, liquid debt markets worldwide.


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