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ECB vows thorough bank exams

Many European banks are saddled with bad loans or are unable to raise money.

DANIEL ROLAND/AFP/Getty Images

Many European banks are saddled with bad loans or are unable to raise money.

FRANKFURT — The European Central Bank detailed the parameters of a widely anticipated review of eurozone banks Wednesday, promising it would thoroughly examine lenders’ ability to withstand shocks and their exposure to risk.

Mario Draghi, the central bank’s president, said the review, which will take a year, will be “an important step forward for Europe and for the future of the euro-area economy.”

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The review of 130 large lenders is intended to address one of the underlying problems in the eurozone economy by forcing weak banks to deal with problems such as bad loans and insufficient capital. Credit remains tight in much of Europe, in part because many banks are burdened with bad loans or unable to raise money. Without credit, a vibrant recovery is almost impossible.

But there have been questions about what will happen if the ECB finds banks with grave problems. It is unclear where the money would come from to recapitalize damaged banks, and political leaders are still arguing about how to close down those that are terminally ill without creating more financial turmoil.

The review is scheduled to be completed in October 2014, just before the ECB becomes the central supervisor for eurozone banks.

Ignazio Angeloni, an ECB official overseeing the review, said that banks will be required to hold capital equal to 8 percent of their money at risk. But the requirement will be phased in from 2014 to 2018, in line with new regulations for EU banks.

Working with national regulators, the ECB will look at lenders accounting for 85 percent of the eurozone banking system. The list, published Wednesday, includes household names like Deutsche Bank in Germany and BNP Paribas in France, plus some banks that attract less attention, such as Volkswagen Bank in Germany, which provides car financing.

Several subsidiaries of foreign banks are on the list, including Bank of New York Mellon in Belgium and Merrill Lynch International Bank in Ireland.

If some banks need more money, the ECB said, they should first try to raise money from private investors. But if they are unable to, governments will need to step in. It remains unclear whether a country like Italy, which has many weak banks and is stuck in recession, would be able to afford another bank rescue.

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