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Today, the European Banking Authority (EBA) released the 2014 EU wide stress test methodology and macroeconomic scenarios.

Among others, the methodology states that the stress test is conducted on the assumption of a static balance sheet. The zero growth assumption applies on a solo, sub‐consolidated and consolidated basis for both the baseline as well as the adverse scenario. No workout of defaulted assets is assumed in the exercise. In particular, no capital measures taken after the reference date 31/12/13 are to be taken into account.

The adverse scenario is designed by the ESRB. According to the EBA, it reflects the systemic risks that are currently assessed as representing the most pertinent threats to the stability of the EU banking sector: (i) an increase in global bond yields amplified by an abrupt reversal in risk assessment, especially towards emerging market economies; (ii) a further deterioration of credit quality in countries with feeble demand; (iii) stalling policy reforms jeopardising confidence in the sustainability of public finances; and (iv) the lack of necessary bank balance sheet repair to maintain affordable market funding.

2014_0429 stress test EU

Source: Wall Street Journal

Following, please find an excerpt of the current EBA FAQ.

What is the timeline for the stress test?

The EBA expects to publish the final results of the 2014 EU-wide stress test in October 2014. The timeline has been agreed and coordinated with the ECB and is, therefore, in line with the overall timeline of the Single Supervisory Mechanism (SSM) Comprehensive Balance Sheet Assessment.

Data templates and guidelines will be distributed immediately after the launch of the methodology and scenarios in April 2014. Advance data collection will be started immediately to be completed end of May. First preliminary results are expected to be submitted to the EBA in mid-July and near-final results tentatively early September for the final round of quality checks and then absolute finalisation of the results will be just ahead of publication. Precise deadlines for the data submission of banks will be defined and communicated by the CAs.

 

How will data and results be published?

The most important aspect of the EBA’s common EU-wide exercise will be the disclosure of comparable and consistent data and results across the EU. Results will be disclosed on a bank by bank basis and the EBA will act as a data for the final dissemination of the outcome of the common exercise. The level of granularity of the data disclosed will be at least consistent with that of the 2011 EU-wide stress test and 2013 EU-wide Transparency Exercise. It will include the capital position of banks, risk exposures and sovereign holdings.

The credibility of the EU-wide stress test rests on transparency; market participants will be able to determine for themselves how supervisors and banks are dealing with remaining pockets of vulnerability.

Summary: The AQR treatment on accounting impairment demonstrates how important prudential valuation can be in the future if the ECB continues to use it. In this case, banks will have to consider the differences between accounting and prudential valuation to ensure an adequate and integrated capital and balance sheet management, as long as accounting impairment is based on the incurred loss model. A reliance on accounting valuation to manage the balance sheet may not suffice. 

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The three elements of the Comprehensive Assessment are the Supervisory Risk Assessment, the Asset Quality Review (AQR),  and the Stresstest. Together, these elements provide an in-depth understanding of material balance sheet risks. As economic risks are linked to balance sheet calculation, it is crucial to differentiate between the application of adequately interpreted accounting rules on one side, and the prudential adjustments required by the Comprehensive Assessment on the other side. The latter shall assure a proper and (more) harmonised calculation of the CET1 (Common Equity Tier1). Both, the identification of prudential balance sheet adjustments and the recalculation of CET1 is be part of the AQR. The AQR itself comprises three key phases:

  • portfolio selection: result- identification of exposures with the highest risk and portfolios which should be included in the execution phase; status: completed
  • execution: result:-identification of prudential balance sheet adjustments ; status: on-going
  • collation: result- AQR adjustment calculation to CET1; status: scheduled for July 2014

With respect to the close relation between accounting and prudential valuation it is important to note that the “AQR should not be seen as an attempt to introduce greater prescription into the accounting rules outside of the existing mechanisms.” Among others, the following questions arise:

Impact of the prudential AQR valuation adjustments on bank accounting: The ECB states that “Banks would not be expected to incorporate into policies, processes or reporting findings from the AQR that relate to a bank failing to be the right side of the ECB threshold if they are compliant with the relevant accounting principles. The bank would not be required to restate accounts or apply the AQR assumptions on an on-going basis, i.e. the AQR-adjusted CET1% is not a de- facto alternative accounting standard.”

Treatment of prudential adjustments on accounting valuation in the course of the Comprehensive Assessment: “The AQR will generate a series of parameters that will act as inputs to the stress test process. The key inputs to the stress test will be: any adjustments to data segmentation highlighted by DIV, an AQR-adjusted Common Equity Tier 1% (CET1%) parameter (to allow the impact of the AQR to be applied to stress test projections of the CET1%) and probability of Impairment (PI) and Loss Given Impairment (LGI) parameters for use in the stress test. The way these parameters will be used in the stress test is pending the final methodology for the stress test, which is currently underway. As mentioned, the AQR-adjusted CET1% will be used to compute the final stress test outcomes.” One follow-up action of the ECB can be, however, to ask banks to capitalise for a shortfall relative to the ECB threshold in incremental Pillar 2 capital requirements.

Consequences if the ECB concludes that the accounting rules used by the bank are not in line with best practice interpretations: Following completion of the Comprehensive Assessment, “NCAs will produce a letter to significant banks outlining any areas where the bank is found to be outside of accounting principles and the required remediation actions the bank would be expected to take (including adjustments to the carrying values of assets). These issues would be expected to lead to adjustments to available capital and hence be reflected in Pillar 1 capital requirements at the next relevant reporting date. For the purposes of clarity,  areas where the bank falls short of the “ECB threshold” but is in line with accounting standards would not be included in the letter to the bank.”

The  case of prudential impairment calculationIAS 39, Para 59 (EU) states: “A financial asset […] is impaired and impairment losses are incurred if, and only if, there is objective evidence of impairment as a result of one or more events that occurred after the initial recognition of the asset (a ‘loss event’) and that loss event (or events) has an impact on the estimated future cash flows of the financial asset […] that can be reliably estimated. It may not be possible to identify a single, discrete event that caused the impairment. Rather the combined effect of several events may have caused the impairment. Losses expected as a result of future events, no matter how likely, are not recognised. […]” The ECB defines the following approach in its AQR-Phase2-Manual: “Initially, the NCA bank team will compare the impairment triggers of the significant bank as of December 31st with the minimum triggers provided in Table 38 of the manual and the loss events stipulated IAS 39. Where the significant bank has defined additional or more conservative triggers, these should also be taken into consideration in addition to the minimum triggers. This implies that the evidence of impairment definition is at least as conservative as the significant bank’s current classification.The NCA bank team should assess each exposure in the sample for objective evidence of impairment on December 31st 2013. This requires a two-step approach:

  • First, assessment for each exposure whether a loss event has happened based on the triggers provided. Not all of the triggers apply to each debtor (e.g. CDS is not relevant for retail mortgages or large SME).
  • Second, for each exposure with a loss event, the assessment whether the loss event has an “impact on the estimated future cash flows” of the exposure. If this is the case, the exposure will be considered as having evidence of impairment.“

In contrast to the above mentioned criteria, current or past cash flows do not necessarily need to be impacted for an exposure to be considered impaired according to IAS 39. Additionally “NCA bank teams will classify exposures as having evidence of impairment irrespective of whether the impacted future cash flows indicate that an impairment loss should be registered (i.e. impaired loans where impairment loss is assessed as 0 due to collateral should be viewed as being impaired because cash flows will be impacted by the foreclosure of collateral).”

Ab dem 1.1.2014 gelten die strengeren Anforderungen der CRR an das bankaufsichtliche Eigenkapital. Während die Bestandteile bspw. des harten Kernkapitals klar definiert sind, hat die EBA den Auftrag mit Blick auf die Werthaltigkeit von Kapitalbestandteilen nachzujustieren. Konkret wird aktuell der Abzug nicht realisierter Gewinne vom bankaufsichtlichen Eigenkapital als Prudential Filter sowie, unter dem Stichwort Prudent Valuation, der Abzug von (aufsichtsrechtlichen) Bewertungsanpassungen von zum beizulegenden Zeitwert bilanzierten Vermögenswerten und Verbindlichkeiten diskutiert.

Im August und Juli diesen Jahres hat die EBA ein Discussion Paper (Prudential Filter) sowie ein Consultation Paper (Prudent Valuation; draft RTS) zu den beiden Ansätzen veröffentlicht: EBA_CP_2013_28_Prudent Valuation EBA-DP-2013-03 (DP Technical Advice unrealised gains)

Folgend interessieren zwei wesentliche Punkte:

a) Das Zusammenspiel des Prudential Filters mit den bilanziellen Bewertungsvorschriften nach IAS 39.

b) Das Zusammenspiel der Prudent Valuation mit dem Prudential Filter.

Prudential Filter und Bewertungsvorschriften nach IAS 39: Der Prudential Filter kann bei asymmetrischer Berücksichtigung von a) lediglich nicht realisierten Gewinnen und b) Anlagebuchpositionen unerwünschten Einfluss auf die Kapital- und Bilanz-Steuerung der Banken nehmen. Wir befürworten daher die Ansicht der EBA, dass eine Portfolio-Betrachtung eingenommen werden sollte, um nicht realisierte Verluste entsprechend gegenrechnen zu können, unabhängig davon, ob die Positionen in den (bilanziellen) Kategorien AfS oder FV-Option gehalten werden. Dieser Logik folgend, wäre im Fall von Sicherungsbeziehungen der nicht realisierte Gewinn des Grundgeschäfts mit dem nicht realisierten Verlust des Sicherungsgeschäfts zu verrechnen.

Prudential Valuation und Prudential Filter: Die beiden Ansätze verfolgen im Detail unterschiedliche Ziele, haben jedoch gemeinsam, dass das bankaufsichtliche Eigenkapital reduziert wird: Der Abzug von Bewertungsanpassungen (Prüden Valuation) soll vom harten Kernkapital (CET1) vorgenommen werden. Reduktionen aus dem Prudential Filter können sämtliche Kategorien des bankaufsichtlichen Eigenkapitals betreffen. Wesentlich im Zusammenspiel dieser beiden Ansätze ist aber die mögliche Doppelbelastung des bankaufsichtlichen Eigenkapitals im Fall von Finanzinstrumenten, die den Kategorien AfS und FV-Option zugerechnet werden. Dies erscheint vor der gemeinsamen übergeordneten Zielsetzung einer Verbesserung der Verlustabsorptionsfähigkeit nicht sachgerecht; im Rahmen der weiteren Ausarbeitungen von Empfehlungen gegenüber der EU-Kommission sollte eine entsprechende Differenzierung erfolgen.

Gemeinsam ist beiden Ansätzen, dass die EBA im Auftrag der EU-Kommission die Werthaltigkeit von Eigenkapitalpositionen hinterfragt. Das gehört bei der Bankenanalyse zum Standardrepertoire und erscheint durchaus sachgerecht, bspw. hat eine positive Neubewertungsrücklage im Verlauf der Bankenkrise keine hinreichende Verlustabsorptionsfähigkeit gezeigt. Genau dieses Kriterium definiert  die EBA konsequenterweise als Voraussetzung dafür, dass die Bestandteile des harten Kernkapitals, also a) Kapitalinstrumente,[1] b) deren Agio, c) einbehaltene Gewinne, d) das kumulierte sonstige Ergebnis, e) sonstige Rücklagen und f) den Fonds für allgemeine Bankrisiken als solches anerkannt werden: Diese Werte müssen „dem Institut uneingeschränkt und unmittelbar zur sofortigen Deckung von Risiken und Verlusten zur Verfügung stehen“ (Artikel 26 Abs. 1 CRR). Wagen wir einen Ausblick: Insbesondere von dem Prudential Filter werden vor allem Banken mit einer (hohen) positiven Neubewertungsrücklage aus Fremd- oder Eigenkapitalinstrumenten betroffen sein. Zudem wird – im Kontext IFRS 9 betrachtet – ein weiterer Baustein dafür gelegt, das Kreditgeschäft zu standardisieren und die zum beizulegenden Zeitwert bewerteten Positionen zu reduzieren.

Zur Zeitschiene des Prudential Filter “unrealised gains”: Am 2. August hat die EBA ein erstes Diskussionspapier zu diesem Thema veröffentlicht. Die Konsultationsfrist läuft bis zum 27. September 2013. Bis zum 1. Januar 2014 sollen der EU-Kommission Empfehlungen zu alternativen Behandlungsmöglichkeiten vorgelegt werden (Artikel 80 Abs. 4 CRR). Die Erstanwendung ist im Rahmen der Übergangsvorschriften Artikel 468 CRR ab dem 1.1.2015 realistisch.


[1] Sofern die Voraussetzungen der Artikel 28 f. CRR erfüllt sind.