The European Central Bank (ECB) will assume EU banking supervision tasks in November 2014 in its role within the single supervisory mechanism. In preparation, the ECB has conducted a comprehensive assessment of 130 banks.

The comprehensive review consisted of two components:

  • an asset quality review (AQR) being a point-in-time assessment of the accuracy of the carrying value of banks’ assets as of 31 December 2013; and
  • a forward looking examination of the resilience of banks’ solvency to two hypothetical scenarios, also reflecting information arising from the AQR.

The ECB has now published the results of the comprehensive assessment which has found a capital shortfall of €25 billion at 25 banks. Twelve of the 25 banks have already covered their capital shortfall by increasing their capital by €15 billion in 2014. Banks with shortfalls must prepare capital plans within two weeks of the announcement of the results. The banks will have up to nine months to cover the capital shortfall.

The AQR has found that banks’ assets need to be adjusted by €48 billion, which will be reflected in the banks’ accounts or prudential requirements. In addition, using a standard definition for non-performing exposures (any obligations that are 90 days overdue, or that are impaired or in default), the review found that banks’ non-performing exposures increased by €136 billion to a total of €879 billion.

The comprehensive review also found that a severe scenario would deplete the banks’ top quality, loss-absorbing common equity tier 1 (CET1) capital by about €263 billion. This would result in the banks’ median CET1 ratio decreasing by 4 percentage points from 12.4% to 8.3%. This reduction is higher than in previous similar exercises and is a measure of the rigorous nature of the exercise.

View ECB’s in-depth review shows banks need to take further action, 26 October 2014