ECB Plans to Limit Stress-Test Inputs in Bank Checks

The European Central Bank 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 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.

“This solution makes sense,” said Fabrizio Bernardi, a Milan-based analyst at Fidentiis Equities. “Every bank has its own area of risks, so a full translation from the AQR to stress tests would be meaningless -- disclosure should be given only on significant risk assets.”

ECB officials have vaunted the credibility of the stress test that it is conducting with the European Banking Authority 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 said in an e-mailed statement that the “materiality threshold” would not apply to AQR findings that are directly related to a bank’s capital position. This would, for example, mean that all under-provisioned non-performing loans detected in the AQR are carried over.

Robustness Gauge

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.

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.”

Avoiding Leaks

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 harmonized data on non-performing loans that has never before been available.

To give time for the market to digest the information before the ECB takes over supervision on Nov. 4, officials have penciled in a date of Friday, Oct. 17, to disclose the outcome of the Comprehensive Assessment publicly, Bloomberg News reported on July 8. That date could still change.

The ECB aims to minimize the risk of results leaking early and causing market turmoil, warning banks from disclosing any findings resulting from the interaction between auditors and lenders, according to the document.

To avoid a “disorderly publication of the outcome of the comprehensive assessment,” results will be given “very close to the public disclosure in order not to create disclosure obligations under the securities market regulation,” the document shows.

Banks will be informed of the AQR results in August only in case they have “a very severe capital impact,” to take corrective measures. When the final results will be disclosed banks will have two weeks to submit capital plans including corrective measures. The document showed that lenders will receive a detailed timetable for releasing results as well as dates for discussion of preliminary findings before publication.

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