European Central Bank

Stress-test parameters set for European lenders

PUBLISHED : Monday, 03 February, 2014, 2:45pm
UPDATED : Tuesday, 04 February, 2014, 7:59am

The European Central Bank said yesterday that the euro area's largest banks will have to show their capital will not fall below 5.5 per cent of their assets in an economic crisis, matching stress-test parameters set by the European Banking Authority.

In an update on its three-part comprehensive assessment of 128 euro-zone banks, the ECB said it would apply the stress-test parameters announced by the London-based EBA on Friday. It said it expected the scenarios for the stress tests would be sent to lenders by the authority at the end of April.

The Frankfurt-based ECB is conducting a health check of lenders before taking over supervision duties for the euro zone in November, in the first pillar of a banking union.

The EBA, with whom the central bank will conduct a stress test as the final part of the assessment, said financial institutions across the European Union would have to show their capital would not dip below 5.5 per cent of their assets in a simulated economic downturn.

"Preparations for the stress test are well under way and we are confident that, in close co-ordination with the EBA, the outcome will be transparent and credible, boosting the European banking sector," ECB vice-president Vitor Constancio said.

"We have noted that capital and provisioning measures have been taken since the exercise was announced. Banks are frontloading preparations for the assessment, and are strengthening their balance sheets, which is a welcome development."

The central bank also outlined the definitions for non-performing loans in the second part of the assessment, known as the asset quality review.

"[The review] will use a definition of non-performing exposures that has been agreed with the EBA, which means that every material exposure 90 days past due will be classified as non-performing even if not recognised as defaulted or impaired," it said.

Bank holdings of sovereign debt and their respective maturities would also be disclosed in full, the ECB said. It said it was working with national supervisors to finalise the methodology for the review and would release full details this quarter.