Post comprehensive assessment – what we can expect from the ECB?

Post comprehensive assessment – what we can expect...

What will be the key areas that the European Central Bank (ECB) will focus on after the bank stress test results were issued?

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Road ahead

It has only been a few weeks since the European Central Bank (ECB) took over supervisory responsibility for banks in the euro area and, while the conclusion of the ECB’s comprehensive assessment “paves the way for tough, fair and independent supervision” it will take some time before we can objectively assess the impact of this new single supervisory mechanism can be assessed.

In the meantime, the largest euro area banks would do well to recognize that the lessons learned in the course of the recent Asset Quality Review (AQR) will be used by the ECB to inform ongoing supervision. Indeed, Sabine Lautenschläger1, Member of the Executive Board of the ECB, made it clear that a number of themes from the AQR would need to be addressed, for example:

  • Where the AQR credit review identified inadequacies in provisioning levels (or where the collective provision is below AQR estimation) the ECB will enter discussion with banks and their auditor about the 2014 financial statements;
  • Where the AQR revealed structural weaknesses in banks’ data systems this will be addressed as a priority (note: this may link with wider risk data aggregation work);
  • The use of national discretion and, in particular, transition arrangements will be reviewed to help create a level playing field (note: this follows a Basel Committee on Banking global review of Pillar 1 national discretions).

We also expect an increased focus on the quality of Pillar 1 internal modelling.

As the ECB grows into its new role and the euro area banks adjust to a new style of supervision designed to rebuild trust and bolster the safety and soundness of the euro area banking system, let’s hope the transition process is not too painful for certain firms, but strikes the appropriate balance between financial stability and sustainable profitability.

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