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Europe Moves to Protect Against Bank Failures UniCredit, Italy’s Largest Bank, Posts Surprisingly Big Loss
(about 3 hours later)
FRANKFURT — Europe’s long road toward a more coherent financial system moved a few steps forward on Tuesday after the European Central Bank unveiled details of its plan to force lenders to confront their problems, and negotiators in Brussels neared a deal for winding down failing banks. FRANKFURT — UniCredit, Italy’s largest bank, reported Tuesday a stunningly large fourth-quarter loss of 15 billion euros, or about $21 billion. The bank acknowledged that its holdings were far less valuable than previously thought and set aside a huge sum to cover problem loans.
In October, the central bank said, it will release results of a review intended to make sure that banks are properly valuing assets like real estate or government bonds in their portfolios, and that they are setting aside enough money to cover possible losses. The net loss came as a surprise, but may portend similar shocks from other euro zone banks as they face imminent scrutiny of their books by the European Central Bank.
Saying it would be impossible to examine all assets, the central bank plans to use spot checks to draw conclusions about the health of banks. The so-called asset quality review will examine assets the banks have valued at 3.72 trillion euros total, or about $5.15 trillion. That is nearly 60 percent of the assets held by the 128 large banks subject to scrutiny, the central bank said. The report by UniCredit came on the same day that European leaders took further steps to repair the euro zone banking sector and to create a more coherent financial system.
While the central bank did not offer any major surprises, it gave lenders more detail about what kind of work-up to expect and underscored the bank’s determination to do a thorough job to restore trust in the banking system. The European Central Bank in Frankfurt announced details of its plan to force lenders to confront their problems, while negotiators in Brussels neared a deal for winding down failing banks.
The central bank said that it would release results in October of a review intended to make sure that banks are properly valuing assets like real estate or government bonds in their portfolios, and that they are setting aside enough money to cover possible losses.
Saying that it would be impossible to examine all assets, the central bank plans to use spot checks to draw conclusions about the health of banks. The so-called asset quality review will examine assets the banks have valued at €3.72 trillion. That is nearly 60 percent of the assets held by the 128 large banks subject to scrutiny, the central bank said.
UniCredit’s announcement Tuesday suggested that the central bank’s review may be prompting lenders to take a hard look at their books and to disclose problems voluntarily rather than be forced to do so.
Investors seemed to applaud UniCredit’s move to deal with past problems. The company said that it expected to make a profit of about €2 billion this year, and announced a five-year turnaround plan. After initially falling, shares in UniCredit, which is based in Milan, rose more than 5 percent.
“For UniCredit, 2013 was a turning point and we are now poised to further increase our lending and support of the real economy in Italy and in Europe,” Federico Ghizzoni, the chief executive of the bank, said in a statement.
UniCredit booked a €9.3 billion loss from a revaluing of its holdings in Italy, Austria and Eastern Europe, while it set aside an additional €7.2 billion to cover losses from problem loans. Loan loss provisions now total €9.3 billion, the bank said.
The losses were partly offset by operating profit that UniCredit put at €2.1 billion.
While the European Central Bank did not offer any major surprises on Tuesday regarding its review of the banking system, it did give lenders more detail about what kind of work-up to expect and underscored the bank’s determination to do a thorough job to restore trust in the sector.
The central bank, along with national bank regulators in the 18 countries of the euro zone, will disclose in October the results of stress tests to determine whether banks could withstand shocks like a financial crisis or recession.The central bank, along with national bank regulators in the 18 countries of the euro zone, will disclose in October the results of stress tests to determine whether banks could withstand shocks like a financial crisis or recession.
Banks found to have problems will then be forced to take remedial action, like raising more capital or even shutting down. It is also possible that banks will be forced to act sooner, if regulators discover hidden problems in the course of the review.Banks found to have problems will then be forced to take remedial action, like raising more capital or even shutting down. It is also possible that banks will be forced to act sooner, if regulators discover hidden problems in the course of the review.
Banks could also be compelled to restate their financial results if regulators decide that the lenders have not properly valued their portfolios.Banks could also be compelled to restate their financial results if regulators decide that the lenders have not properly valued their portfolios.
In Brussels this week, European finance ministers moved closer to setting up a system for shutting down terminally ill banks without creating a financial crisis.In Brussels this week, European finance ministers moved closer to setting up a system for shutting down terminally ill banks without creating a financial crisis.
The Economic and Financial Affairs Council of the European Union, made up of the finance ministers and central bank officials of the 28-nation bloc, was discussing Tuesday the final shape of the banking resolution authority, called the Single Resolution Mechanism, that ministers agreed to create in December.The Economic and Financial Affairs Council of the European Union, made up of the finance ministers and central bank officials of the 28-nation bloc, was discussing Tuesday the final shape of the banking resolution authority, called the Single Resolution Mechanism, that ministers agreed to create in December.
Along with the European Central Bank’s new supervision of systemically important banks, the Single Resolution Mechanism is intended to help end the links between banks and sovereign states that contributed to the euro crisis. The resolution authority will eventually have a €55 billion war chest. Along with the European Central Bank’s new supervision of systemically important banks, the Single Resolution Mechanism is intended to help end the links between banks and sovereign states that contributed to the euro crisis. The resolution mechanism will eventually have a €55 billion war chest.
The Single Resolution Mechanism has to be formally adopted by the Parliament of the European Union, but approval has been held up by disagreements over the speed at which the fund will be financed and over how much say member states will have in any decision to shut down big banks. Jeroen Dijsselbloem, who speaks on behalf of the 18 euro zone finance ministers, on Monday night expressed optimism that a deal would be reached this week. The Single Resolution Mechanism is subject to the approval of the European Parliament, but that has been held up by disagreements over the speed at which the fund will be financed and over how much say member states will have in any decision to shut down big banks. Jeroen Dijsselbloem, who speaks on behalf of the 18 euro zone finance ministers, on Monday night expressed optimism that a deal would be reached this week.
The central bank and the ministers are trying to address dangerous flaws in the European banking system that were exposed by the euro zone debt crisis. The central bank and the ministers are trying to address flaws in the European banking system that were exposed by the euro zone debt crisis.
In some countries, regulators were overly protective of their own banks and allowed them to avoid dealing with bad loans or other problems. As a result, many banks are too weak to lend, creating a credit crunch that is particularly acute in countries like Italy.In some countries, regulators were overly protective of their own banks and allowed them to avoid dealing with bad loans or other problems. As a result, many banks are too weak to lend, creating a credit crunch that is particularly acute in countries like Italy.
In addition, there was no system to shut down sick banks in an orderly way that did not require a taxpayer bailout. In Ireland, for example, the cost of bank rescues helped cripple the economy.In addition, there was no system to shut down sick banks in an orderly way that did not require a taxpayer bailout. In Ireland, for example, the cost of bank rescues helped cripple the economy.
There is general agreement that Europe needs to create a banking union to replace the piecemeal system of the past. But progress has been slow because countries like Germany have resisted plans that would involve sharing the cost of bank failures in other euro zone members.There is general agreement that Europe needs to create a banking union to replace the piecemeal system of the past. But progress has been slow because countries like Germany have resisted plans that would involve sharing the cost of bank failures in other euro zone members.
The central bank on Tuesday published a technical manual that national bank supervisors will use to assess banks, under the supervision of the central bank.
Regulators conceded, however, that they will not be able to examine all assets. Instead, they will use samples to draw conclusions about a bank’s total portfolio.