News Column

The European Central Bank to limit stress-test inputs as review deadline nears

July 11, 2014

Bloomberg News

Brussels: The European Central Bank (ECB) plans to limit the amount of data it carries over from its asset review into a subsequent stress test as it tries to manage the burden from an unprecedented health check of euro-area lenders.

Instead of entering all loan values obtained in the Asset Quality Review (AVR) that ends this month into its stress test, officials will apply a "materiality threshold" to ensure only significant results are incorporated, according to a draft ECB document seen by Bloomberg News.

Regulators have yet to sign off on the methodology, including a definition for that term.

ECB officials have vaunted the credibility of the stress test that it is conducting with the European Banking Authority (EBA) compared with previous exercises, citing the use of scrubbed data from 160,000 credit files to enhance its reliability. The document, scheduled for publication on July 17, shows the degree of pragmatism the ECB is applying as it tries to square a desire for methodological rigor with a schedule to start supervising around 120 banks in November.

"The ECB plans to publish the manual for the join-up of the AQR and the stress test in August, and it will include the definition of the materiality threshold," the ECB said in a statement provided by a spokeswoman.

The stress test pits bank balance sheets against a range of negative, hypothetical economic events to gauge their robustness, and are designed to help the ECB take over supervision with a clear picture of the banking system's health.

July 14 meeting

The ECB's supervisory board is due to meet next week to sign off on the methodology for joining up the AQR and the stress test, the two parts of its so-called Comprehensive Assessment. Banks, which have submitted templates on how they assume the negative scenarios will affect balance sheets, will be required to adjust their numbers after a review by the ECB.

"The quality assurance process of the bottom-up stress- test results of the banks has started and will continue until early September," the document shows. "Thereafter, the AQR findings and the stress-test results will be joined up, and only then meaningful results of the comprehensive assessment can be determined."

Lenders across the euro area's 18 countries are taking part in the exercise, which started last November. By late October, the ECB will release results that show a detailed picture of bank capital levels and provisioning, as well as a level of harmonised data on non-performing loans that has never before been available.

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Source: Times of Oman

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