Factbox: Details of health check of euro zone banks

Reuters

LONDON (Reuters) - The European Central Bank vowed to submit euro zone banks to a comprehensive batch of tests next year, aimed at restoring confidence in the industry, providing transparency on assets and setting out a consistent supervisory approach.

Here are key details of its plan:

CAPITAL BENCHMARK

Banks will need to hold 8 percent of common equity Tier 1 capital as a minimum, using the Basel III definition but including transitional arrangements.

The benchmark will consist of a common equity Tier 1 ratio of 4.5 percent, a 2.5 percent capital conservation buffer, and a 1 percent add-on to take into account the systemic significance of the banks.

The ECB said the median core Tier 1 capital ratio for the largest euro area banks is about 12 percent.

BANKS

The ECB said about 130 banks in the 18 member states will take part in the test, accounting for 85 percent of the euro area banking system.

A provisional list of banks includes 24 German banks, 16 in Spain, 15 in Italy, 13 in France, seven in the Netherlands, five in Ireland and four each in Greece, Cyprus and Portugal.

TIMING

The assessment will start in November 2013 and finish in October 2014, just prior to the ECB assuming its supervisory role. The ECB will release results in a single disclosure.

The ECB will design the assessment and monitor it, and national regulators will execute it in each country. Consultancy Oliver Wyman will be the main advisor, and each country will use other private sector advisors.

AIMS

The ECB said there are three main goals:

Transparency - to enhance the quality of information available on the condition of banks;

Repair - to identify and implement necessary corrective actions. That can include increasing provisions banks have for assets and forcing them to recapitalize, retain profits, issue equity, change their funding mix or sell or separate assets. Capital shortfalls should come from private sources, but if that is insufficient public backstops might be needed, and should be established before the completion of the exercise;

Confidence building - to assure all stakeholders that banks are fundamentally sound and trustworthy.

PROCESS

It will be a three step process:

A supervisory risk assessment to review risks, including liquidity, leverage and funding;

An asset quality review (AQR) to assess the quality of banks' assets, including asset and collateral valuation and any provision, based on balance sheets at the end of 2013. It will cover sovereign and institutional holdings and corporate and retail exposures, and both the banking and trading books will be reviewed;

A stress test to examine the resilience of banks' balance sheet to stress scenarios, carried out in conjunction with the European Banking Authority.

The ECB said more details will be released in due course.

(Compiled by Steve Slater, Editing by Patrick Lannin)

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