AQR: No, not the investment group!

In our acronym-laden world, the 3 letters, A..Q..R, are now putting fear into the hearts of bank executives and boards across the EU’s Eurozone- the dreaded Asset Quality Review is now in full swing, with the ECB having published its “modest”  285-page (of course, a mere jotting compared with Dodd-Frank’s monstrous corpus!) Phase 2 Manual giving guidance to the national regulators and their support crews of consultants on how to go about the process of ensuring that each of the banks targeted for review is screened and judged by late summer, so that the ECB can take up its new “super-regulator” role by November 2014.

Based on the muttering emanating from those subject to AQR, much time and energy will be expended on assuaging the assessors, detracting from the running of an actual bank- hardly conducive to enhancing the Eurozone’s supposed economic “recovery”. And already banks are trying to front-run the possible outcomes by announcing sudden and significant increases in provisions- witness Unicredit’s recent announcement of a modest EUR 14BN net loss for 2013 stemming from goodwill impairment and significant increases in loan loss provisions- and still its cash cover for impaired loans is only 52% (by its own accounting.)

In Awbury’s view, there will be much haggling between banks, regulators and the ECB before all is done, because the ECB has really only one chance to demonstrate its credibility ab initio, while the banks will want at least some ability to prepare for the consequences of what, in some cases, we are sure will be bloody outcomes.

Why do we at Awbury take such an interest in such European goings-on in the banking sector? Because we believe that the major, diversified (re)insurers with whom we work are potentially a significant source of new and standby capital for the beleaguered; and, therefore, have begun discussions with potentially affected banks about ways in which Awbury may be able to help structure capital support mechanisms tailored to a bank’s specific needs.

So, give as a call.  You will be glad you did.

-The Awbury Team”

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