ECB publishes manual for Asset Quality Review

11 March 2014

The ECB published its 285-page manual on the methodology for Phase 2 of the AQR. The manual provides guidance for the national competent authorities and their third-party support on carrying out the exercise. Phase 2 follows the portfolio selection (Phase 1) and will run until August 2014. (Includes EBF comment.)

• Manual contains methodology for 10 specific work blocks in “Phase 2” (on-site inspection) of the asset quality review (AQR).

• Key work blocks include the review of processes, policies and accounting, credit file review and collateral value appraisal, and review of level 3 fair value assets (see Annex for a description of all 10 work blocks).

---

The AQR process is due for completion in October when the results will be released together with the results of the stress test conducted in cooperation with the European Banking Authority.

The manual includes detailed guidance on:

• procedures for validating data and checking model inputs;
• how to value material exposures and collateral and determine provisioning needs;
• processes for quality assurance and progress tracking to ensure timely completion;
• when to use independent, external valuations for assets;
• the use of industry benchmarks to assess market values.

The AQR is a key component of the comprehensive assessment, which aims to enhance the transparency of the balance sheets of significant banks, trigger balance sheet repair where necessary, and rebuild investor confidence prior to the ECB taking over its supervisory tasks in November 2014.

Some key statistics of Phase 2 for the 128 banks subject to the comprehensive assessment:

• Total amount of risk weighted assets (RWA) of the portfolios selected for the review: €3.72 trillion, equivalent to 58 per cent of total RWA across the banks
• Estimated number of credit files reviewed on average per bank: 1,250

Press release including annex on AQR execution phase

Full manual

---

EBF comment

The EBF fully supports the challenging asset quality review by the European Central Bank as an essential step towards the construction of the single supervisory and resolution mechanisms in the European Union.

After completion of the portfolio selection in February by the supervisors, 14 March was the deadline for the next step in the AQR process whereby banks had to deliver to their national supervisors their so-called ‘loan tapes’ for the selected portfolios. Based on the preliminary feedback that the EBF has received from its members, the significant banks are very much committed to supplying the data that the review demands of them.

It is clear that this asset review is ambitious and unprecedented, which may raise some tension between data collection and deadlines. Nevertheless, European banks are committed to cooperating with the ECB in order to ensure an efficient review process to serve a healthy banking sector with banks that can focus on financing the economy.

Full statement

© ECB - European Central Bank