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August 20, 2014 5:28 pm

ECB bank audit to cover consultants in cash

By Claire Jones and Alice Ross in Frankfurt and Sam Fleming in LondonAuthor alerts

European regulators will pay close to half a billion euros to consultancy firms and auditors for their work on the region’s health check of its biggest banks – with a large portion of these costs being passed on to the lenders themselves, according to Financial Times research.

The European Central Bank and eight national regulators, including the eurozone’s five largest economies, will spend up to €487.7m on fees to external advisers for the comprehensive assessment, a screening of the region’s 128 biggest lenders.

Policy makers hope the exercise will help to restore investors’ confidence in the region’s troubled banking sector. The ECB, which takes charge of banking supervision later this year, has said the assessment is a “necessary first step” for establishing a safer, pan-European banking union.

The probe of banks’ balance sheets is now in its final stages, with the results set to be announced in October. Banks will then have just two weeks to come up with plans to plug any capital holes the regulator finds in their finances. While several regulators will pass on the costs to the banks involved, Banca d’Italia and Banque de France will pay for the external costs of the exercise.

The biggest spender of the eight banking watchdogs is Germany’s BaFin, which is paying out around €240m on the assessment, according to one person familiar with the process. The regulator, which has declined to comment on the fees, is passing the cost on to banks in the industry.

Estimates by some of the German banks participating in the exercise suggest the total cost to lenders in the country, when the fees to their own advisers are included, will be between €360m and €480m.

The Dutch central bank alone has five companies helping it with the comprehensive assessment, including BlackRock Solutions, a consultancy and accountants KPMG. The costs, which will be billed to the banks themselves, have been estimated at between €42.5m and €61.7m. This figure includes extra internal costs, such as the deployment of central bank staff.

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The Banque de France is set to pay €80m for the asset quality review and stress tests of its 13 largest lenders.

One of the central players in the exercise is Oliver Wyman, the consultancy group, which has a team working at the ECB’s Frankfurt headquarters. The ECB will pay the company, which led the stress tests of Spanish banks two years ago, €14m to support the preparation and implementation of the assessment, according to a filing by the ECB. The consultant is also working for a number of national authorities, including the Banca d’Italia, which said it will pay the firm €7.3m for its assistance.

The teams in national authorities are separated from the one at the ECB by Chinese walls, according to people familiar with the matter. The so-called “Big Four” accountants, PwC, KPMG, Deloitte and Ernst & Young, also have significant roles.

Along with the external firms, more than 6,000 ECB and national central bank staff are working full time on the exercise.

The ECB declined to comment on the estimates, but said the costs were “necessary investment to restore confidence, increase transparency and achieve repair where necessary.”

“We expect the Comprehensive Assessment and subsequently the banking union to potentially have a number of positive impacts including increased financial stability, decreased risk premiums and lower cost of funding, and increased credit flow to the real economy,” the ECB said.

Similar exercises have proven helpful in the past, with the US Federal Reserve’s examinations of banks in 2009 widely praised for boosting investor confidence – although that was a simpler project covering just 19 lenders.

Senior bankers have said that they welcome the stress tests and hope they will be viewed by market participants as trustworthy. “We hope the tests will finally put concerns over the transparency of European bank balance sheets to bed,” said one.

Other specialists are more sceptical, however. Prem Sikka, professor of accounting at Essex Business School, said: “It is not clear if we are going to get good value for money from these accountants and consultants. The auditors in particular did not have a good track record in 2008, when they gave distressed banks a clean bill of health.”

“My impression is regulators are too reliant on auditors and consultants, and they need to be weaned off them and build up greater in-house expertise,” he added.

David Sproul, chief executive of Deloitte UK, acknowledged the professional services firm had benefited from more banking regulation. Mr Sproul said: “Anywhere that there’s regulation creates an opportunity for us.”

The research is based on tenders, statements by officials and calculations of the costs of earlier regulatory exercises. Other national regulators taking part in the exercise declined to provide estimates.

http://www.ft.com/intl/cms/s/0/ab4e00e2-286a-11e4-b085-00144feabdc0.htm…