31 October 2013
The European Central Bank (ECB) is to begin a comprehensive assessment of the largest EU banks, carrying out a risk assessment, an asset quality review and a stress test for each bank.
Beginning in November 2013, the assessments will involve approximately 130 banks across 18 member states in the EU and, the entire process will take 12 months to complete.
The assessment will consist of three elements: a supervisory risk assessment to review, quantitatively and qualitatively, key risks, including liquidity, leverage and funding; an asset quality review (AQR) to enhance the transparency of bank exposures by reviewing the quality of banks’ assets, including the adequacy of asset and collateral valuation and related provisions; and a stress test to examine the resilience of banks’ balance sheet to stress scenarios.
According to the ECB, the aims of the comprehensive assessment are to foster transparency to enhance the quality of information available on the condition of banks; to repair – which includes identifying and implementing necessary corrective actions, if and where needed; and to build confidence to assure all stakeholders that banks are fundamentally sound and trustworthy.
Speaking to Governance & Compliance, Hugh Morris vice president of business development, banking and insurance EMEA at Genpact commented: ‘To regulate international and global financial organisations, regulators are increasingly seeking to co-operate internationally – e.g. Basel. However, national self-interest still impinges on these efforts. While the ECB is trying to get Europe to march to the beat of the regulatory drum, individual jurisdictions both inside and outside the EU, such as Luxembourg, that wish to attract business through regulatory arbitrage, are setting lighter touch regimes as a tool of competitive advantage. The uneven implementation of (EU) regulation could be the real threat to European competitiveness. A global framework is what is most needed and least likely to occur.’
Markus Gujer head of solutions management, risk and performance in SunGard’s capital markets business, also speaking to Governance & Compliance, said that it ‘is encouraging to note is that the ECB’s latest news on the asset quality review (AQR) does gives more clarity on how the process will be conducted, with the ECB sending teams into the banks, which will include outside consultants’.
Commenting on likely outcomes of the AQR, Gujer said that ‘it could trigger recapitalisations of banks, particularly in Italy, Spain and Portugal, during 2014; as well as a need to close the capital gap and therefore the EU needs a process similar to Troubled Asset Relief Programme (TARP) in the US. It has been recognised that the TARP process has been successful and that US banks have started to restart commercial lending in a way European banks are yet to do’.
Gujer also picked on the lack of clarity regarding how public the process will be. ‘It is likely that the AQR results will not be made public but the exercise is immediately followed by a stress test (Oct 2014) which is likely to be made public, although this is not yet clear’.