ECB set to probe banks’ cash stamina

THE European Central Bank (ECB) said on Wednesday it would check up on dozens of banks’ abilit y to wit hstand a crisis from a new angle, look ing t his time into how long t heir cash piles would hold out.

The ECB’s banking super v ision arm will ca lculate a so-ca lled “sur v iva l period”, defined as “the number of days that a bank can continue to operate using available cash and collatera l wit h no access to funding markets”.

Around 100 banks will pass under the super v isors’ microscope.

Ten years after the collapse of Lehman Brothers, the latest “stress test” differs from past rounds as it is not based on a wider simulated scenario like a global economic or political crisis.

Instead, each bank will be put through a batter y of “adverse and extreme hy pothetica l shocks” at dif ferent levels of intensit y, causing “increasing liquidit y [cash] outflows”.

The ECB “will not assess the potential causes of these shocks or the impact of wider market turbulence”, it said.

Nor will it build into the simulation a potential policy response – like emergency loans – from the central bank.

The tests are especia lly unusual as they do not examine how economic headwinds would impact a bank’s capita l ratio, or t he relationship bet ween its capita l and its assets – a measure super v isors have focused on lifting since t he 2008 financial crisis.

But the spotlight on liquidity is especially timely as it harks back to Lehman’s demise for lack of cash.

Since then, banks have been required to keep enough liquidity on hand to cover short-term financing needs.

The stress test is to begin immediately and last for four months.