ECB to comb the books of 16 Spanish banks as part of pan-European examination

The European Central Bank (ECB) will subject 16 Spanish banks to a thorough examination as part of a comprehensive review of the state of health of the European financial sector.

Spain along with Germany will have the most banks subject to the ECB’s scrutiny over the next 12 months. The ECB said the review will cover about 85 percent of the euro-zone banking system.

The Spanish banks subject to the review include Santander, BBVA, Caixabank, Sabadell, BFA-Bankia, Popular, BMN, Bankinter, Ibercaja, Kutxabank, Unicaja, Liberbank, Banco CEISS and the two nationalized lenders that are being readied for privatization: Catalunya Banc and NCG Banco.

After nine consecutive sessions of new closing highs for the year, the Spanish blue-chip Ibex 35 index ended down 1.84 percent on Wednesday, with market observers pointing to concerns about the banks as the main reason for the decline.

“The assessment is an important step in the preparation of the single supervisory mechanism and, more generally, towards greater transparency of the banks’ balance sheets and consistency of supervisory practices in Europe,” the ECB said in a statement released Wednesday. A total of 128 lenders with assets of over 30 billion euros will be examined, with the probe to be carried out over 12 months from November with the help of local authorities and independent third parties.

In an interview with Bloomberg, ECB President Mario Draghi said he would not hesitate to fail banks that do not pass the stress tests they will be subjected to. “If they do have to fail, they have to fail. There’s no question about that.” he said.

Previous stress tests carried out on the European banks were panned as lacking credibility. The test carried out on Cyprus’s banks in November 2012 showed they needed an additional 2.5 billion euros in capital a few months before a 10-billion-euro European bailout was required.

“The test is credible because the ultimate purpose of it is to restore or strengthen private sector confidence in the soundness of the banks, in the quality of their balance sheets,” Draghi said. “Ultimately that’s the objective, to have private-sector money to be put into the banking industry.”