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Sept. 18 (Bloomberg) -- The European Central Bank’s review of bank balance sheets may not be enough to revive investors’ confidence in financial institutions because the test does not address litigation risks, UBS AG Chairman Axel Weber said.

“The market has really moved beyond seeing the major risk in banks’ balance sheet,” Weber, former ECB governing council member, said in a Bloomberg Television interview with Manus Cranny yesterday. “The market is now much more focused on operational risk, i.e. litigation risk and others, and those are not being stressed. So even if you reassure the market about some of the risk related to counterparty and to the usual financial risk, that’s not going to be a confidence-inspiring result per se because there is another big elephant in the room that is not being stressed.”

The ECB plans to publish results of a review of banks’ books and their performances in a hypothetical economic downturn, known as a stress test, in October before taking over as supervisor of Europe’s largest banks the following month. European banks may still face $50 billion in litigation costs after already paying fines and setting aside funds worth $82.3 billion, Morgan Stanley analysts estimated in a report this week.

More Capital

The Swiss financial regulator last year told UBS and Credit Suisse Group AG, the country’s biggest banks, to hold more capital for operational risks such a litigation. UBS, the largest Swiss lender, has said the demand will probably result in the bank reaching its return on equity target at least a year later than originally planned.

The stress test, which the Frankfurt-based ECB is running with the European Banking Authority, will probably help improve trust in the financial system somewhat, Weber said, adding that he’s not blaming anyone for not addressing litigation risks in the review.

“A quick fix by just having the central bank look at the assets, make their own statement and then everyone has trust in the bank, that’s an idealistic view,” Weber said. Investors “need to be reassured every day about your business model, about the solidity of your capital position, about how you deal with litigation risk, how you’re changing the bank, and that’s a day-to-day process. It’s down to boards and managements of banks to re-establish that trust, and I think there is a lot more to be done.”

To contact the reporter on this story: Elena Logutenkova in Zurich at elogutenkova@bloomberg.net To contact the editors responsible for this story: Elisa Martinuzzi at emartinuzzi@bloomberg.net

Bloomberg