Transcript Asset Quality Review results

Comprehensive Assessment
Stefan Kerbl, Principal Expert, ECB
Sunday 26th October 2014
Introduction to the comprehensive assessment
Rubric
The three primary aims of the Comprehensive Assessment
are transparency, repair and confidence building
Transparency
Enhance the quality and quantity of information
available on the condition of banks
Repair
Identify and implement necessary corrective
actions, if and where needed
Confidence
building
Reassure all stakeholders that SSM banks are
fundamentally sound and trustworthy
More broadly the exercise aims to facilitate banks’ provision of credit to the
European economy by reducing uncertainty over their solvency
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Introduction to the comprehensive assessment
Rubric
The Comprehensive Assessment comprises of two main
components – an Asset Quality Review and a Stress Test
1. Asset Quality Review
• In depth review of banks’ balance sheets:
‒ Assessment of data quality, asset valuations,
classifications of non-performing exposures,
collateral valuation and provisioning
‒ Covers credit and market exposures, following a
risk-based, targeted approach
2. Joint ECB / EBA Stress
Test
• Forward-looking view of banks’ shock-absorption
capacity under defined baseline and adverse
scenarios
• Conducted in collaboration with the European
Banking Authority (EBA)
Results of the Asset Quality Review were incorporated into the Stress Test
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Introduction to the comprehensive assessment
Rubric
The exercise was comprehensive in its scope and
nature
Comprehensive in scope
Comprehensive in nature
•
19 participating countries
• 816 individual portfolios examined
in detail
•
130 participating banks
• 119,000 debtors analysed in detail
•
82% of total SSM banking assets covered
• 170,000 collateral items (re)valued
•
Every portfolio of every participating
bank examined and a risk-based sub-set
selected for review in extensive detail
• 825 provisioning models challenged
• 4,500 securities revalued
• 70 derivative pricing models reviewed
Granular analysis with 40 million data points for the Stress Test alone,
equivalent to 300,000 per bank
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Stress Test recap
Rubric
Scenario building blocks: four main sources of risk
starting with global vulnerabilities
Domestic demand
confidence-driven
shocks
Sovereign bond
yield differentiation
Access to and
costs of bank
funding
impacted
Global sources
of risk
•
•
•
Increased risk aversion, broad-based
sell-offs and re-pricing
EMEs specifically impacted, with a
severe decline in world trade
Currency depreciation and funding
stress in CEEs
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Stress Test recap
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Three important features distinguish the ECB CA stress
test from previous EU-wide stress test exercises
1. a comprehensive methodology
•
prescriptive also for parts of the stress that are less focussed on previously (NII,
PPP)
2. a systematic and centrally-led quality assurance process
•
Thoroughly defined QA approach in the CAST manual
•
Each bank had to provide up to 307,000 data points (circa 40 million in aggregate)
•
Involving 100FTEs at central ECB level and hundreds of FTEs across the SSM
3. The thorough assessment of starting values via the AQR
•
a join-up process for the AQR and stress test outcomes
•
Both book values and risk parameters
•
Mechanistic and comprehensive
•
Detailed description of the methodology in the CAST manual
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Annex
Stress Test recap
Rubric
AQR results will be used to adjust starting point and
stress test projections
• The join-up process connects and reinforces the ‘point-in-time’ AQR and the
‘forward-looking’ stress test, thereby strengthening the overall exercise
• The join-up is in line with some previous national exercises (e.g. Spain, Cyprus,
Slovenia) – but unparalleled on the euro area level
• The AQR findings impact on the starting point CET1 ratio of all banks
• Where the AQR identifies material issues, these is also used to adjust bank’s
forward looking stress test results (e.g. loan losses)
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Stress Test recap
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Quality assurance (QA) was a key ingredient for ensuring
credible results from a constrained bottom-up stress test
Enhance accuracy and credibility by providing a systematic review of individual
bank results
•
Key objective to minimise the risk that banks passing the stress-test will
subsequently fail
•
Also key for ensuring a level playing-field in a multi-country context
Quality Assurance scope:
•
Stress test results (baseline and adverse scenario)
•
Stress test results including the join-up impact
•
Efficient framework for QA by focusing on material issues (traffic light approach)
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Stress Test recap
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A central QA framework has been put in place to review
results from individual and cross-country perspectives
and by risk dimension
The central QA framework
•
Specify a number of quantitative checks to be performed on banks’ submitted
results. These constitute a minimum standard to be applied consistently
across all countries, with Red/ Amber/ Green (RAG) thresholds.
•
employs ECB top-down stress test models, in-market and cross-market
comparisons
•
harnesses complementary qualitative information on each bank (e.g.
reviewing explanatory notes)
•
Three lines of defence: NCA bank teams – NCA centrally – ECB
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On the Results
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Comprehensive Assessment results
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Comprehensive Assessment results
Comprehensive Assessment - key figures
Key results
•
The Asset Quality Review (AQR) results in a gross impact on asset carrying values of
€48 billion
•
In total, a €136 billion increase in non-performing exposure was identified
•
Combining the AQR with the stress test the Comprehensive Assessment results in:
- €263 billion capital depletion over the three-year horizon of the exercise under the
adverse stress test scenario
- Median 4% reduction of the CET1 capital ratio of in scope banks
•
In aggregate, the Comprehensive Assessment resulted in a €24.6 billion capital shortfall
across 25 participant banks
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Comprehensive Assessment results
Rubric
Comprehensive assessment identified a capital
shortfall of €24.6 billion across 25 banks
Comprehensive assessment capital shortfall by driver
SSM level (€ BN)
+2.7BN
+10.7BN
Note: Numbers do not add up due to rounding
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Comprehensive Assessment results
Rubric
Capital shortfall was observed at banks from 11 of
the 19 countries in scope of the exercise
Comprehensive assessment capital shortfall by driver
By country, as % RWAs
Total
shortfall 2.37 8.72 1.14 9.68 0.07 0.86 0.87 0.54 0.23 0.13 0.03 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00
(€ BN)
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Comprehensive Assessment results
Rubric
The median bank’s CET1 ratio falls by 4% in the
adverse scenario
Comprehensive assessment impact on CET1 ratio under the adverse scenario
Median by country of participating bank, %
• Median bank’s CET1 ratio
declines from 12.4% to
8.3%
SSM
median: 4.0%
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Rubric
Asset Quality Review results
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Asset Quality Review results
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Across the SSM, the Asset Quality Review (AQR) led to a
€48BN adjustment to asset carrying values
Asset Quality Review impact on available CET1 capital
By AQR workblock (€ billion)
Additional provisions
Other capital
adjustments
Projection
of findings
Impact from
risk-based
sample
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Asset Quality Review results
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The AQR led to an €136 BN increase in non-performing
exposure, with increases across all asset segments
Change in NPE exposure, pre- and post-AQR
By asset segment (€ billion)
Individually assessed
(credit file review)
Commentary
Collectively assessed
(collective provisioning)
•
Divergent bank
definitions of nonperforming exposures
were harmonised leading
to €55 billion added nonperforming exposure
•
Following harmonisation,
an increase in nonperforming exposure of
€81 billion was observed in
the credit file review
•
In total, non-performing
exposure increased by
€136 billion, representing
a 18% total adjustment
NPE exposure (€BN)
+18%
+19%
+33%
+14%
+4%
+1%
+36%
+31%
+73%
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Asset Quality Review results
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Provisioning increased by a total €43 BN across all asset
segments
Change in provisions
By Asset Segment (€ billion)
Commentary
Individually assessed
(credit file review)
Collectively assessed
(collective provisioning)
+10%
Provisions (€BN)
+16%
•
Total specific provisions
increased by €43 billion,
a 12% overall adjustment
•
Provisions increased as a
result of both the credit
file review and collective
provisioning workblocks
•
Shipping (28%), Large
SME (16%) and Large
Corporates (16%)
experienced largest
relative increases
+16%
+12%
+28%
+10%
+5%
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+6%
+5%
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Asset Quality Review results
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ECB Quality Assurance had a tangible impact on NPE
classification, ensuring harmonised treatment
Example of impact of ECB Quality Assurance
Number of performing debtors hitting 2 or more impairment triggers,
pre- and post- ECB Quality Assurance (%)
Remedial approach taken
• ECB identified banks in where debtors
were hitting triggers but not being
classified as NPE
• ECB discussed with NCAs and
challenged auditor decisions at the
individual debtor level
• In some cases the decision against
reclassification was justified
• In a significant number of cases,
decision was withdrawn and the debtor
reclassified to NPE along with debtors in
similar scenarios
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Asset Quality Review results
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ECB Quality Assurance resulted in a significant
increase in collateral haircut levels
Example of impact of ECB Quality Assurance
Mean collateral haircuts pre- and post- ECB Quality Assurance (%)
Remedial approach taken
• ECB reviewed haircut levels across
NCAs for each asset segment
• ECB discussed with NCAs and
challenged auditor decisions at the
individual debtor level
• In some cases the ECB accepted the
NCA submission
• In others additional haircuts were
agreed and applied
Note: The exhibited number of banks is not necessarily exhaustive for the example NCA
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Asset Quality Review results
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In total, collective provisioning led to an increase in
provisions of €16BN, of which 62% was IBNR
Collective provisioning adjustment – IBNR
SSM-level, € billion
•
In total, more than 800 portfolios
across most AQR asset classes were
assessed
•
Collective Provisioning workblock
identified the need for additional
collective provisions of €16 billion,
- €6 billion of retail specific provisions
- €10 billion of additional IBNR
•
Key drivers included
• Application of EBA simplified
NPE definition
• Credit file review findings leading
to adjustments in LGI parameter
• Adjustments to RRE collateral
values impacting LGL
• Bank use of non point-in-time
parameters
+23%
Collective provisioning adjustment – specific provisions
SSM-level, € billion
+6%
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Asset Quality Review results
Rubric
Collective provisioning Quality Assurance aligned
parameters to ECB defined fall back assumptions
Collective provisioning parameter distribution – emergence period
Distribution of performing exposures by emergence period
Comparison of other fall back parameters
Number of exposures
Parameter
ECB defined fall
back assumption
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Fall back
assumption
Observed
average
LGL secured
60%
50.4%
LGL unsecured
90%
86.9%
Original effective
interest rate
4%
3.6%
Sales ratio
75%
78.0%
Sales ratio
volatility
18%
21.6%
Appraiser
discount
5%
5.4%
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Asset Quality Review results
Rubric
The adjustment of the Fair value exposures review
was €4.6 billion, with 66% from CVA adjustments
Fair value exposures review adjustment
By workblock (€ billion)
• Non-derivative positions were
assessed through independent
revaluations leading to a €1.2
billion adjustment
• Adjustment on CVA reserves was
significant, with a 27% increase of
€3.1 billion identified
• Complex derivative pricing models
were also reviewed, with modelling
errors or inappropriate assumptions
leading to a further €0.2 billion
adjustment
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Rubric
Stress Test & Join-up results
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Contribution of the Stress Test
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Overall, total adverse scenario capital depletion is
€263 billion
Comprehensive assessment adverse scenario capital depletion
SSM level, (€ BN)
Key drivers
• Total gross AQR adjustment
of €48 billion, and €34
billion net of tax offset
• The stress test (and Join-up
with AQR results) led to a
capital depletion of €182
billion in the adverse
scenario
Gross AQR
adjustment
• In addition, the increase in
RWA in the adverse
scenario increases capital
requirements in the amount
of €47 billion
1Stress
Test results include the impact of the Join-Up
Note: Scenario capital depletion and the effect on required capital are based on the 2016 adverse scenario
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Rubric
Stress Test results
SSM banks' average CET1 ratio is projected to
increase from 11.8% to 12.0% in the baseline
Aggregate post-JU stress test effect1 by risk drivers under the baseline scenario
Key drivers
•
Improvement in the solvency
position under the baseline mainly
reflects
– Projected accumulation of
pre-provision profits (3.6
percentage point contribution
to the change in the CET1
ratio)
– Projected loan losses (-2.5
percentage point contribution)
•
The average development of
participating banks’ solvency
positions, however, masks
variations across individual
institutions and countries
1. Weighted means; excluding the AQR impact on starting point capital
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Rubric
Stress Test results
SSM banks' average CET1 ratio is projected to
decrease from 11.8% to 8.8% in the adverse
Aggregate post-JU stress test effect by risk drivers under the adverse scenario
Key drivers
•
Increase in loan losses (-4.5
percentage point contribution to
the change in the CET1 ratio)
•
Lower pre-provision profits
compared to the baseline
(corresponding to a 1.3
percentage point lower positive
contribution the change in the
CET1 ratio)
•
“Administrative and other
expenses” have an impact on the
overall results; however, they
remain largely unchanged
between the baseline and adverse
scenario and mainly reflect staff
and other administrative costs that
regardless of the scenario have a
negative impact on banks' loss
absorption capacity
1. Weighted means; excluding the AQR impact on starting point capital
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Stress Test results
Loan losses and net interest income are key drivers
of divergence from baseline to adverse
Aggregate post-JU stress test effect by risk drivers under the adverse scenario
14
12
-0.9
-0.2
-0.2
-0.3
0.0
-0.5
10
CET1 ratio
-2.0
+0.9
8
6
12.0
8.8
4
2
0
2016 baseline
Net interest
income
Net fee and
commission
income
Net trading
income
Sovereign
FVO/AFS
Admin and other Risk weighted
op expenses
assets
Loan losses
Taxes, dividends
and others
2016 adverse
1. Weighted means; excluding the AQR impact on starting point capital
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Rubric
Stress Test results
Corporate and retail portfolios are the key drivers of
loan losses in both scenarios
Decomposition of loan losses across portfolios and banks under the baseline
and adverse scenario
Baseline scenario
Key drivers
•
Loan losses across banks are
mainly driven by the corporate
and retail portfolios, both under
the baseline and adverse
scenarios
•
Under the baseline scenario,
the median CET1 percentage
point reduction due to losses is:
– 0.9% in the corporate
segment
– 0.5% in the retail segment
•
Results under the adverse
scenario are, however, more
severe with a median CET1
percentage point reduction of
– 1.6% in the corporate
segment
– 1.1% in the retail segment
Adverse scenario
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Rubric
Stress Test results
Under the adverse scenario, the median decline in NII
is larger and more varied across banks
Net interest income development across banks under the baseline and adverse
scenario, year-on-year % changes
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Key drivers
•
While the picture is heterogeneous
across banks, the median decline in
net interest income is larger under
the adverse than the baseline
scenario
•
Moreover, the distribution of changes
in net interest income across banks
is in general wider under the adverse
scenario
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Stress Test results
RWAs grow in net terms across the horizon, resulting
in higher capital requirements
RWA development across banks under the baseline and adverse scenario, year-on-year
% changes
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Key drivers
•
Risk-weighted assets experience
net growth across the horizon,
albeit at a declining rate
•
For the large majority of banks
under the static balance sheet
assumption, the nominal balance
sheet size remains the same by
design
•
Risk weights for the median bank
grow under the baseline scenario
from 1.0% in the first year to
0.7% in the third year, and under
the adverse scenario 3.2% in the
first year to 0.9% in the third year
•
Increased RWAs result in higher
capital requirements
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Stress Test results
The stress test impact differs across banks under the
static and dynamic balance sheet assumption
Distribution of changes to CET1 ratios across banks following the static vs.
dynamic balance sheet assumption under the baseline and adverse scenario,
cumulative % changes
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Key drivers
•
Banks under the dynamic balance
sheet assumption are less heavily
affected under the baseline scenario
•
In the adverse scenario larger CET1
ratio declines are observed for banks
under the dynamic balance sheet
assumption. This could reflect that
restructuring banks
– Are generally weaker and more
vulnerable to stress tests
– May be located in countries with
relatively more severe scenarios
•
In cases where banks provided both,
static and dynamic templates, the
dynamic version generally resulted in
less severe effects
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Join-up results
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Join up effect varies by bank but is driven by bank
AQR impact
Join-up effect by bank in relation to AQR impact
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Key drivers
•
Join up effect is highly
correlated with the
magnitude of AQR findings
•
The strongest join-up effect
(above 1% of RWA) is
observed for banks where
AQR had a major impact
•
For banks with small or
negligible AQR findings, the
join-up effects on average
were similarly small (<0.2%
of RWA)
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Rubric
Join-up results
Impairments are the major driver of join-up effect by
change in CET1 in the baseline scenario
CET1 effect of join-up by type (credit vs. other effects) under the baseline scenario
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Rubric
Join-up results
Distribution of join-up effect by type is similar, but for
greater impacts overall, in the adverse scenario
CET1 effect of join-up by type (credit vs. other effects) under the adverse scenario
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Stress Test and Join-up results
The post-JU impact of the Stress Test is 0.2% in the
baseline and -3.0% in the adverse
Stress test results (post-JU)
Stress test component (€ billion)
Baseline
Adverse
NII
760
686
Net fee and commission income
377
362
Net trading income
25
6
Sovereign FVO/AFS
-1
-28
Admin. and other expenses
-865
-865
Loan losses
-209
-378
Taxes, dividends and other
-45
38
Total CET1 impact (€ billion)
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-181
0.2%
-6
-3.0%
-12
Total CET1 ratio change (percentage points)
of which: Join-up CET1 impact (€ billion)
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On the Scenario
Rubric
1
PROCESS / STORY
2
ASSUMPTIONS / DRIVERS
3
RESULTS / SEVERITY
4
DERIVED RESULTS
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Rubric
Scenario building process
• The baseline scenario was prepared by the European
Commission
• The adverse scenario was proposed by the ESRB, working in
close collaboration with the ECB and the EBA, and it was
finally approved by the EBA Board of Supervisors
• It captures the prevailing view of systemic risks facing the EU
financial system, as identified by the ESRB General Board
• It includes forward-looking paths for key macroeconomic and
financial variables for all EU countries and a large number of
non-EU countries over a three-year horizon
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Scenario narrative
• Starting point: global sources of risk
- Increased risk aversion, broad-based sell-offs and re-pricing
- EMEs specifically impacted, with a severe decline in world trade
- Currency depreciation and funding stress in CEEs
• Triggering EU-specific risks
- Domestic demand confidence-driven shocks (real estate too)
- Sovereign bond yield differentiation re-appearing
- Access to and costs of bank funding impacted
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Scenario building blocks:
Four main sources of risk leading to a set of drivers
Source of risk:
Financial and economic shocks:
Increase in global bond yields amplified by an 
abrupt reversal in risk assessment, including
towards EMEs, and pockets of market liquidity

Financial market shocks worldwide (sovereign bonds, corporate bonds, stock
prices, etc.).
Demand shocks in EMEs

EU countries: foreign demand shocks via a decline in world trade

Currency depreciation and funding stress in CEEs
Further deterioration of credit quality in countries 
with feeble demand, with weak fundamentals and
EU country-specific aggregate demand shocks (via fixed capital formation and
private consumption)
still vulnerable banking sectors
EU country-specific aggregate supply shocks (via shock on user cost of capital,

nominal wages)

EU country-specific house price shocks
Stalling policy reforms jeopardising confidence in 
the sustainability of public finances
EU country specific sovereign bond spread shocks
Lack of necessary bank balance sheet repair to 
maintain affordable market funding

EU-wide shock to short-term interbank interest rates
EU country-specific shocks to borrowing costs for households and corporates (via
shocks to respectively, wealth and user cost of capital)
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1
PROCESS / STORY
2
ASSUMPTIONS / DRIVERS
3
RESULTS / SEVERITY
4
DERIVED RESULTS
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A selection of shocks – aggregated summary
Shocks (deviations from baseline, in basis points or percentage)
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Equity price shocks for EU-countries – country specific
(percentage deviation from baseline levels in 2016)
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Adverse scenario – respective role of ‘drivers’
Contributions of scenario components to
GDP impact
• Global shocks account for c.
40% of the total GDP impact
(percentage point deviation from baseline levels in 2016)
• Shocks to domestic real
economic variables account
for c. 45-50% of the total GDP
impact
• Sovereign debt shocks and
bank funding shocks
together account for c. 1213% of the total GDP impact
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1
PROCESS / STORY
2
ASSUMPTIONS / DRIVERS
3
RESULTS / SEVERITY
4
DERIVED RESULTS
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Key scenario variables – output for the areas
Deviations from baseline levels by end-2016
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Comparison with past EU-wide stress tests
Cumulative GDP impacts in previous CEBS/EBA stress test exercises
(Deviation of adverse from baseline growth rates in percentage points)
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Assessing the severity of the scenario w.r.t. CCAR
Domestic GDP scenarios
Cumulated impact on domestic GDP
(percentage deviation from baseline)
Domestic GDP levels incl. baseline
(pre-stress Q0 GDP is scaled to 100)
Pre-stress GDP level
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1
PROCESS / STORY
2
ASSUMPTIONS / DRIVERS
3
RESULTS / SEVERITY
4
DERIVED RESULTS
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Market risk benchmarks – derived from the scenario
• Derived as a function of and consistent with the underlying
macro-financial baseline and adverse scenarios; no
additional exogenous shocks
• 170 market risk parameters including interest rates, equity
prices, commodity prices, swap spreads, credit spreads,
dividends, as well as volatilities of market risk parameters
• For major economies such as the euro area, the United
States, the United Kingdom, Japan, other developed
markets, and major emerging market regions
• Next to historical “scenarios”; different exercise
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Market risk benchmarks – already available
Calibrated market risk parameters
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Credit risk benchmarks – to come next…
• Derived as a function of and consistent with the underlying
macro-financial baseline and adverse scenarios; no
additional exogenous shocks
• Loss rates projections computed for the EU countries and
20 non-EU countries and regions
• Main portfolio segments includes the non-financial
corporate sector (real-estate related and non- real-estate
related), household mortgage loans, consumer credit, as
well as financial institutions.
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