Overview EU-wide Stress Test 2014
Mario Quagliariello – Head of the Risk Analysis Unit
24/07/2014 - PRUEBAS DE ESTRÉS - La Visión del Regulador y el Impacto en la Banca
JORNADA DEL CLUB DE GESTIÓN DE RIESGOS - Madrid
Agenda
1
Context
2
Key features
3
Process and timeline
2
It's a long way to the ST … It's a long way to go…
EU-wide
stress test 2011
 Pre-emptive capital
raising
 Credit sensitivities
 Disclosure (capital
and sovereign)
EU-wide
recapitalisation
 9% after sovereign
buffer
 EUR 204bn capital
strengthening
 CT1 ratio of 11.7%
comparable to US
 EU CT1 sufficient if
RWA can be trusted
EU-wide
stress test
2014
AQRs
 EBA recommendation
 Common definition of
NPL and forbearance
 CAs responsibility
 PIT assessment of
capital, with minimum
threshold
 Forward looking
assessment and
reaction function
 Significant
frontloading
RWA
consistency
 Ongoing, leading to
supervisory
consistency,
transparency and
benchmarking
3
Capital strengthening: from the EBA recap exercise to
“frontloading” ahead of stress test
Tier 1 ratio – excluding hybrids (weighted average, 55 EU banks,
source: KRI, RAR)
 T1 ratio excluding hybrid instruments after the
EBA’s 2011 Recommendation reached 11.6%
December 2013 (from 9.2% in Dec-2011).
 Capital offerings continued in Q4 2013 and first
half of 2014, both common equity and hybrids.
Total issuance of AT1 CoCos by EU banks in 2014 (as of 27 May,
billion EUR, 10 EU banks, Source: Bloomberg, EBA calculations)
 Issuance of equity has allowed the cleaning of
balance sheets (additional provisions) and
contributed to strengthening banks, with
completed and announced deals since July 2013
amounting to EUR 45 billion (SSM banks - 49
banks out of the 128).
 AT1 CoCos issuance (EU banks) around EUR 22bn
during 2014 (as of 27 May).
• 19 AT1 offerings of 10 EU banks in Q2
2014, compared to 8 offerings in total in
2013.
4
De-risking, deleveraging and cleaning of balance sheets
Total assets and Risk-weighted assets – EUR tn, and
specific allowances for loans (source: Risk Dashboard)
 European banks have accomplished significant adjustments on the
asset side by
• cutting risky assets (de-risking);
• shrinking their balance sheets (deleveraging);
• cleaning balance-sheets
provisioning).
(loan
sales
and
increasing
 The adjustment accelerated towards the end of 2013 (cut-off date
for the AQR and the stress test). Banks have been frontloading
impairments: additional provisioning of EUR 25bn between
Jun2013 and Dec2013. Also the recent increase in NPLs might to
some extent reflect the new EBA definitions, contributing to a
more reliable picture.
 Positive developments, but no room for complacency. The AQR
has to assess the reliability of balance sheets and banks may end
up needing additional capital. Banks and supervisors need to be
prepared and ready to take actions as a result of these exercises.
5
Agenda
1
Context
2
Key features
3
Process and time line
6
Who does what
Common methodology, templates
Data hub for final dissemination
European Systemic Risk Board
European Commission
•
Common scenario (in cooperation with
ECB, NCAs)
28 Nations, 28 National Supervisory Authorities
and ECB
•
•
Responsibility for the quality assurance
Assessment of the reliability and
robustness of banks’ assumptions, data,
estimates and results
Definition and communication of any
additional sensitivities
Supervisory reaction function
Non-SSM
National Competent
Authorities
SSM
ECB, National
Competent
Authorities
•
•
Joint work and information sharing
•
•
European Banking Authority
124 banks in 2014 EU-wide stress test
•
20 Non-SSM banks
104 SSM banks
Calculation of bottom-up stress test
results
7
What drives the EBA stress test methodology
Why an EU-wide stress test?
Comparable and transparent identification of potential risks across the entire EU
 Comprehensive, consistent and relevant scenario
Tools
 Constrained bottom-up methodology (key features, risk quantification,
templates for data collection)
 Benchmarks
Transparency
 Detailed disclosure to inform supervisors and market participants
Cooperation
 Cooperation amongst supervisors and other involved parties
8
Overview key features (1/2)
Consolidation
Scenario
Time-horizon
and reference
date
Capital
• Highest level of consolidation
• Perimeter of the banking group as defined by the CRD/CRR
• Common baseline and adverse macro-economic scenarios and stressed market
parameters for positions sensitive to a change of market prices
• CAs may develop additional sensitivities to incorporate country specific features
• Consolidated year-end 2013 figures
• Scenarios applied over a period of three years (from 2014 to 2016)
• CET1, with transitional arrangements; CoCos converting into CET1 or written down
upon trigger are reported if trigger is above the CET1 ratio in the adverse scenario
• CAs may, in addition, assess the impact of the stress test on other yardsticks
• Common application of prudential filters
9
Overview key features (2/2)
Hurdle rate
• 8% Common Equity Tier 1 ratio for the baseline scenario
• 5.5% Common Equity Tier 1 ratio for the adverse scenario
• CA may calibrate possible supervisory measures based on a ladder of intervention
points and set higher hurdle rates
Static balance
sheet
• Zero growth assumption for baseline and adverse scenario and same business mix
• Assets and liabilities that mature replaced with similar financial instruments in
terms of type, credit quality and original maturity; no workout of defaulted assets
• Exemption due to mandatory restructuring plans announced before reference date
Risk coverage
• Solvency stress test – credit risk, market risk, sovereign risk, securitisation, cost of
funding, non-interest income and costs, operational risk; no liquidity stress test
• CAs may include additional risks but results reported under common approach
Process
• EBA responsible for common methodology, templates, disclosure
• Competent authorities responsible for quality assurance, additional
sensitivities/scope/yardsticks, reaction function
• Outcome of AQR may inform starting point
10
Overview disclosure: 9 templates, 12k data points
P&L
• Main P&L items like net interest income, net trading income,
impairments for financial assets and other comprehensive income
~130
Credit risk
• Exposure, RWA, value adjustments, provisions, default and loss rates
• No disclosure of credit risk parameter
Market risk
• Market risk position by main risk types
~40
• Securitisation exposure, RWA and impairments
~50
Securitisation
Sovereign
RWA
Capital
• Sovereign exposure by country, maturity and accounting treatment
~6,500
~4,930
• RWA by risk type
~50
• Capital position, components, adequacy including, stressed
• Capital restructuring
~310
11
Agenda
1
Context
2
Key features
3
Process and time line
12
Tentative time line
April
Preparation
Calculation
May
June
July
August
September
October
Finalisation
methodology,
templates,
scenario
Advance data
collection
Iteration with
banks
ST calculation by banks
Disclosure
Disclosure preparation
29/04/14
Publication
methodology,
templates,
scenario
Workshop with
banks
Submission
first results to
EBA via CAs
EBA
feedback
on results
to CAs
Publication of
results
Milestones
Publication
ECB
benchmarks
Submission
close-tofinal results
to EBA
13
Process is ongoing and on track (1/2)
 The publication of the stress test methodology and scenarios took place on 29 April 2014.
 An EBA “Q&A” process is in place to ensure immediate support to banks and supervisors.
• We have received more than 1000 questions from banks and published on the EBA extranet.
• The EBA QA team is liaising with the ECB as well as NCAs for more complex or controversial issues.
 Banks have submitted the data for the advance data collection and preliminary results.
• The EBA has run statistical quality checks and provided feedback to NCAs
• The EBA distributed benchmarks on the stress test starting point in June to NCAs as originally
planned and currently working on “deltas”.
• Benchmarks to be used as part of the quality assurance process NCAs and ECB are carrying out
14
Process is ongoing and on track (2/2)
 The EBA is currently discussing details of communication in liaison with SSM colleagues as
well as non SSM countries.
• Including disclosure of additional national sensitivities, and
• Stress test outcome for subsidiaries
• Possible additional yardsticks/metrics to be disclosed
• Interaction with banks
 EBA is facilitating the cooperation and coordination between home and host authorities in the
stress test as well as in the AQR
 Quality assurance and join-up of AQR and ST, led by competent authorities, are key for the
success of the exercise.
15
EUROPEAN BANKING AUTHORITY
Tower 42, 25 Old Broad Street
London EC2N 1HQ
Tel: +44 2073821770
Fax: +44 207382177-1/2
E-mail: info@eba.europa.eu
http://www.eba.europa.eu