The European Central Bank (ECB) published the results of a comprehensive assessment of two Italian cooperative banks, one Estonian bank, and one Lithuanian bank. These four banks were classified as significant and will be now under the ECB supervision: Cassa Centrale Banca—Credito Cooperativo Italiano S.p.A., Iccrea Banca S.p.A—Istituto Centrale del Credito Cooperativo, Luminor Bank AS, and Akcinė bendrovė Šiaulių bankas. All banks that become or are likely to become subject to the direct ECB supervision are required to undergo a comprehensive assessment, which consists of a stress test and an asset quality review. The comprehensive assessment of these banks showed that none of the four banks face any capital shortfalls, as they did not fall below the relevant thresholds used in the asset quality review and the stress test. However, the banks will be expected to follow up on the outcome of the exercise and undertake actions to address the findings of the asset quality review. All four banks had consented to the disclosure of the results of the comprehensive assessment.
The asset quality review is a prudential rather than an accounting exercise and provides ECB with a point-in-time assessment of the carrying values of a bank’s assets on a particular date (December 31, 2019 in the case of these four banks). The asset quality review also determines whether there is a need to strengthen the capital base of a bank. Owing to the nature of the asset quality review as a point-in-time exercise and given that the reference date used pre-dates the outbreak of COVID-19 in Europe, the asset quality review results do not include the impact of the ongoing COVID-19 crisis. The asset quality review for these banks was done on the basis of the latest version of the ECB asset quality review methodology, which was published in June 2018.
The asset quality review was complemented by a stress test exercise, which looked at how the capital positions of banks would evolve under a baseline scenario and an adverse scenario over the three-year period from end-2019 to end-2022 (separate from the 2021 EU-wide stress test). The stress test covered the period of sharp economic contraction following the outbreak of the COVID-19 in Europe and reflected the impact of a selection of related government and regulatory relief measures. The stress test was conducted using the 2020 EU-wide stress test methodology. Both scenarios were updated with the most recent projections at the start of the exercise (mainly the June 2020 Eurosystem staff macroeconomic projections for the euro area). Against this backdrop, ECB decided that only a shortfall in the stress test’s baseline scenario (including the asset quality review and the impact of the join-up process) would be used to trigger the need for recapitalization, whereas the adverse scenario results would only be used to inform the determination of Pillar 2 guidance in the SREP 2021 process. The threshold ratios applied for identifying capital shortfalls were maintained at the same levels as in previous exercises: a Common Equity Tier 1 (CET1) ratio of 8% for the asset quality review and the stress test’s baseline scenario. The CET1 ratio is a key measure of a bank’s financial soundness.
Keywords: Europe, EU, Italy, Estonia, Lithuania, Banking, Asset Quality Review, Stress Testing, Comprehensive Assessment, Regulatory Capital, Significant Institutions, ECB
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