In context

European Central Bank starts new supervisory role with Comprehensive Assessment

January 9, 2014
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In context

The European Central Bank recently started its Comprehensive Assessment of banks which will be subject to its supervision as part of the Single Supervisory Mechanism. In connection with its assessment, the ECB will carry out an asset quality review and a stress test. The timely provision of information requested is expected to put considerable strain on banks.

The European Central Bank (ECB) started its Comprehensive Assessment in November 2013, in preparation for its new role of supervising Europe’s 100 largest banks as part of the Single Supervisory Mechanism. An asset quality review and a stress test form part of this assessment. The timely provision of information requested is expected to put considerable strain on banks.

 

On 4 November 2013, the European Regulation  establishing the Single Supervisory Mechanism entered into force. The regulation is an important step in the overhaul of Europe’s banking supervision, and sees the ECB assuming a central supervisory role in cooperation with national competent authorities of member states. The ECB will fully exercise its new supervisory role from 4 November 2014.

 

In advance of the Single Supervisory Mechanism, the ECB began its Comprehensive Assessment  of more than 100 European banks in November 2013. The assessment is unprecedented in size and scope, and includes an asset quality review and a stress test. In executing its assessment, the ECB works closely with the competent national banks. The ECB will publish all findings of the Comprehensive Assessment before November 2014.

 

The newly introduced asset quality review is expected to begin in January 2014. Focusing on an individual bank’s assets believed to be the least transparent and the most risky, the asset quality review contains both on-balance and off-balance sheet exposures as well as the banking and trading books.

 

Prior to reviewing the data, the ECB will validate banks’ data integrity, and verify and remedy this data where it finds that this is required. Following a strictly sampled portfolio, the asset quality review then assesses the adequacy of banks’ asset valuation. Where necessary, the ECB uses the findings to readjust asset risk valuations. This readjustment may carry notable consequences, since it directly impacts banks’ solvency. Moreover, a readjustment may negatively influence perception of the bank’s dependability.

 

Preparations for the exercise are already in force, as national banks are discussing how the necessary information should be provided. The asset quality review may, however, pose considerable legal difficulties to participating banks. The review requires that banks provide a significant amount of financial data from all of their worldwide operations. This large-scale data collection and transfer may encounter multiple regulatory obstacles, such as banking secrecy, confidentiality of financial information and privacy laws. It is important that banks start their assessment of these laws in time.

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