ECB to give banks six to nine months to cover capital shortfalls following comprehensive assessment
30 Apr 2014 04:04 PM
-
Banks will be expected to cover capital shortfalls
within six to nine months after the disclosure of the results of the
comprehensive assessment.
-
Capital shortfalls arising from the asset quality review
and baseline stress test scenario must be covered by Common Equity Tier 1
(CET1) capital instruments.
-
Capital shortfalls stemming from the adverse scenario
can be covered in other ways, but the use of convertible capital instruments is
subject to limits designed to support the use of instruments with higher
triggers. The instruments with a trigger at or above 7% CET1 qualify to cover
the shortfall up to 1% overall RWA.
-
The
outcome of the asset quality review will influence the results of significant
banks taking part in the EBA stress test exercise. Combining the point in time
asset quality review with the forward-looking stress test is the key strength
of the comprehensive assessment.
The
ECB has informed banks how capital shortfalls must be addressed following the
comprehensive assessment. This announcement follows yesterday's release by
the European Banking Authority (EBA) of the methodology and scenarios for the
EU-wide stress test. Together with the asset quality review, the stress test is
a key pillar of the comprehensive assessment. The ECB has collaborated closely
with the EBA on the stress test methodology and with the European Systemic Risk
Board (ESRB) who produced the adverse scenario. The baseline scenario was
produced by the European Commission. The ECB will publish the results of the
comprehensive assessment in October 2014, before it takes over its supervisory
tasks within the Single Supervisory Mechanism (SSM).
Capital shortfalls will be expected to be covered within
six months for those identified in the AQR or the baseline stress test
scenario, and within nine months for those identified in the adverse stress
test scenario. Recapitalisation measures to cover any shortfalls detected
should rely on capital instruments of the highest quality, unless the
shortfalls are reduced through other means.
Vitor Constâncio, Vice-President of the ECB, said:
“In anticipation of any shortfalls, banks should start to consider what
private sources of capital could be raised as a result of this exercise and
plan accordingly, taking into account that the capital plans they will have to
present can include retained earnings, reduced bonus payments, new issuances of
common equity, suitable strong contingent capital and sales of selected assets
at market prices.”
The
ECB also informed banks of the specific constraints on the capital instruments
that may be eligible to address shortfalls arising from the comprehensive
assessment. Shortfalls revealed by the AQR and the baseline stress test
scenario may only be covered by Common Equity Tier 1 (CET1) capital
instruments. The use of Additional Tier 1 (AT1) capital instruments to cover
shortfalls arising from the adverse stress test scenario is limited, depending
on the trigger point of conversion or write-down. This is intended to ensure a
focus on high-quality capital elements and support the use of higher-trigger
AT1 instruments if they are included in the covering of the capital
shortfall.
The
use of Additional Tier 1 instruments is limited to a maximum of 1% overall risk
weighted assets (RWA), subject to the following
specifications:
-
instruments with a trigger below 5.5% CET1: 0% of
overall RWA;
-
instruments with a trigger at or above 5.5% and below 6%
CET1: up to 0.25% overall RWA;
-
instruments with a trigger at or above 5.5% and below 7%
CET1: up to 0.5% overall RWA;
-
instruments with a trigger at or above 7% CET1: up to 1%
overall RWA.
Further progress has also been made on the AQR.
Danièle Nouy, Chair of the Supervisory Board of the SSM, said:
“Intensive activity on the AQR continues on track and is now running in
parallel with the stress testing exercise, involving an estimated 6,000
supervisors and auditors. In recent weeks, banks’ processes and
accounting-related policies have been reviewed and the relevant information has
been collected for the selection of samples for the credit file review and the
collective provisioning analyses. Reviews of collateral, provisioning and
exposures have started and will be completed by the end of the summer. The AQR
findings will be incorporated into the stress test results, a unique feature of
the comprehensive assessment. This feature is an enhancement not seen in past
large-scale stress test exercises. Following the publication of the results,
the ECB will request banks to submit capital plans detailing how shortfalls
will be covered.”
For
media queries, please contact Uta Harnischfeger, tel.: +49 69 1344 6321 or
Ronan Sheridan, tel.: +49 69 1344 7416