The European Central Bank (ECB) has published a note on the comprehensive assessment of banks in the euro area. The note provides a progress report on the ECB’s Asset Quality Review and identifies eligible measures to cover capital shortfalls detected in the comprehensive assessment. Points of interest include the following:

  • 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 risk weighted assets; and
  • 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.

An accompanying press release states that the ECB intends to publish the results of the comprehensive assessment in October 2014 before it takes over its supervisory tasks within the single supervisory mechanism.

View ECB note on the comprehensive assessment, 29 April 2014

View ECB to give banks six to nine months to cover capital shortfalls following comprehensive assessment, 29 April 2014