The European Bank Asset Quality Review, an inconvenience, but for whom?
Reuters reported on a leaking source from the European Banking Authority who mentioned that Europe has set itself a “completely illusionary” timetable for the next round of bank health checks. An interesting Catch 22 thus ensues: adhering to a strict timetable would lead to cutting corners, thus endangering the reputations of European bank supervisors. Not-adhering to a strict timetable would perhaps improve the quality of the tests and reviews, but these then would be performed too late – with predictable reputation effects.
Apparently, the Asset Quality Review (AQR) is the cause of this untimely news. Last May, EBA chairman Andrea Enria explained that a proper AQR should be done before a credible stress test could be performed: “Concerns remain on asset quality and forbearance, which need to be addressed, this is also a necessary precondition for the credibility of the next EU-wide stress test.” We are now left with faint memories of the 2011 EU Capital exercise being the last stock-take performed on the robustness of European banks. Matters have not improved since Enria’s comments in May. This week, the ECB revealed that it did not have sufficient staff to carry out the AQR.
However, a lack of time and a shortage of staff are not the real problem. Unlike the demotivator below, I don’t think that incompetence is the main cause of the delays.
The AQR is particularly inconvenient for the audit profession.
The AQR will second-guess bank auditors. Auditors should check the quality of assets routinely; be it shop inventory or bank loans. However, from the outset the idea was that the AQR should be done by independent parties. That excludes the audit profession. But even if auditors were considered for the AQR, then still it would be second guessing of their own work or work of a colleague. National supervisors would not happily sign up for the AQR either. Bank supervisors rely on auditors, and it makes no sense to bite the hand that feeds and vets crucial information.
This European second-guessing would make sense. See my blog post from some weeks ago on the lack of progress made by the audit profession on the development of a model that writes down low-quality assets. The audit profession has been dragging its feet for more than five years on impairments. It may therefore make sense to hire outside consultants to perform the AQR. My guess is that the likes of BlackRock, Pimco, and Oliver Wyman would welcome the invite and … deliver on time.