The European Central Bank (ECB) has published a speech given by a member of its executive board, Sabine Lautenschlager. The speech is entitled Making the comprehensive assessment a success.

The single supervisory mechanism will take over the supervision of certain euro area banks in November. In advance, the ECB is conducting a comprehensive assessment of banks’ balance sheets that is intended to ensure that its joint supervisory teams, comprising supervisors from the ECB and national competent authorities can start supervision with a clean slate.

In her speech, Mrs Lautenschlager states that to make the comprehensive assessment a success, two elements are crucial:

• the need to succeed in establishing transparency. In order to positively impact on investors’ perceptions of euro area banks, the ECB must ensure the exercise is sufficiently thorough for a true understanding of the banks’ condition; and
• any weaknesses identified must be addressed in a swift and decisive manner. Findings such as a lack of provisioning or the mis-valuation of assets must lead to direct and effective corrective actions, which ensure that adequate capital levels are reached or maintained.

Mrs Lautenschlager also adds that the comprehensive assessment will be more comprehensive than any previous exercise in terms of its scope and of the number of banks covered. The ECB will examine in detail no less than 760 banking book portfolios.

The comprehensive assessment will have two parts which complement each other – the asset quality review which will give the ECB a point-in-time picture of the state of banks’ balance sheets and the stress test which adds a forward looking element that will focus on the resilience of these balance sheets to certain shocks to the economic and financial system.

For the stress test the ECB will have a double layer of quality checks. First, it will conduct data consistency checks for the bottom-up stress test, checking both model inputs and assumptions, and then carry out a top-down stress test to cross-check the results of the bottom-up exercise.

In the final part of her speech, Mrs Lautenschlager briefly discusses how any identified capital shortfalls will be addressed. First and foremost, the ECB believes that banks will need to fill potential capital gaps via market-based solutions. Also, new capital issued to cover shortfalls will need to be of the highest quality and therefore there is a strong focus on common equity tier 1 capital. In respect of timing Mrs Lautenschlager mentions that relevant recapitalisation actions will only be considered credible and effective if they are carried out swiftly, after the publication of results.

View Making the comprehensive assessment a success, 23 May 2014