Abstract
The first important action taken by the ECB, as banking supervisor, has been the Comprehensive Assessment, where 130 banks have been examined through an AQR and a Stress Test. The main features and outcomes of this exercise are described in this chapter. The ECB’s methodology has raised some controversies, which are addressed here. The main criticism derives from its focus on the CET1 ratio as the only indicator of bank solvency; the CET1 ratio should be complemented with a simple leverage index, which is less prone to manipulations and national biases. The other main limitation is the micro-prudential approach; the inclusion of systemic risk into the adverse scenario may lead to a considerable improvement of the stress test methodology.
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Notes
- 1.
See ECB (2014), page 2.
- 2.
A few significant banks were not examined under the comprehensive assessment of 2014, while other banks covered by the comprehensive assessment were later classified as less significant (see ECB 2015 for details).
- 3.
See ECB (2014), Section 3.2.1.
- 4.
Level 3 assets are those securities without an active market where a price can be observed; therefore they are priced by using internal statistical models. Their name derives from the fair value hierarchy, where Level 1 (2) assets are those for which a quoted price (or other market information) can be observed.
- 5.
The EBA guidelines on the definition of nonperforming loans were issued in October 2013 and became effective as of September 2014.
- 6.
See ECB (2014), page 67.
- 7.
See EBA (2014).
- 8.
See ESRB (2014).
- 9.
See ECB (2014), Section 5.1.
- 10.
The third element is named “join-up” between AQR and stress test.
- 11.
We will address these rules in the next chapter, dealing with the new European bank resolution regime.
- 12.
- 13.
More formally: CET1/RWA = Leverage/Risk Intensity. Actually, this formula does not apply exactly to the numbers shown in Table 4.4, since the definition of capital differs between the first two columns.
- 14.
- 15.
De Groen (2014) reaches the same conclusion, as he finds that by using a non-risk-adjusted capital ratio, several banks of northern Europe (Germany, the Netherlands, Belgium, and France) would not meet the 3 % threshold level under the adverse scenario. This outcome differs sharply from the one obtained by using the risk-adjusted ratio.
- 16.
The evidence provided by Cannata et al. (2012) points to the same conclusion. They find that the risk weights of a sample of 24 banking groups are significantly increasing in the share of assets for which the standard approach (SA) is used in the computation of risk weights. Contrary to the IRB approach, the SA relies on external ratings, so a bank is not allowed to provide its own risk parameters.
- 17.
See Barucci et al. (2014) for a similar view.
- 18.
See ECB (2014), page 94.
- 19.
See ECB (2014), Section 8.2.1. The reported numbers refer to 1 January 2014.
- 20.
See the ECB press release of 26 October 2014, and the Executive Summary opening the Aggregate Report (ECB 2014).
References
Barucci, E., R. Baviera, and C. Milani. 2014. Is the comprehensive assessment really comprehensive? Unpublished paper.
Cannata, F., S. Casellina, and G. Guidi. 2012. Inside the labyrinth of Basel risk-weighted assets: How not to get lost. Bank of Italy Occasional Paper No. 132.
De Groen, W.P. 2014. Was the ECB’s comprehensive assessment up to standard? CEPS Policy Brief No. 325.
EBA. 2014. Main features of the 2014 EU-wide stress test, London, January.
ECB. 2014. Aggregate report on the comprehensive assessment, Frankfurt, October.
ECB. 2015. Annual report on supervisory activities—2014, Frankfurt, March.
ESRB. 2014. EBA/SSM stress test: The macroeconomic adverse scenario, April.
Mariathasan, M., and O. Merrouche. 2013. The manipulation of Basel risk-weights. CEPR Discussion Paper No. 9494.
Steffen, S. 2014. Robustness, validity and significance of the ECB’s asset quality review and stress test exercise. Study requested by the European Parliament (ECON Committee).
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Baglioni, A. (2016). The Comprehensive Assessment. In: The European Banking Union. Palgrave Macmillan Studies in Banking and Financial Institutions. Palgrave Macmillan, London. https://doi.org/10.1057/978-1-137-56314-9_4
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DOI: https://doi.org/10.1057/978-1-137-56314-9_4
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