10 January 2014

Letter from ECB/Draghi to ECON/Bowles on ECB's preparations for the SSM

Concerning accounting rules, the SSM cannot and will not impose new or different accounting standards than those existing in international and national legislation. The vast majority of banks undergoing the assessment (well over 90 per cent in terms of assets) report their accounts under International Financial Reporting Standards (IFRS). It is foreseen to use templates based on IFRS for the purpose of regular supervisory reporting for banks using IFRS and, for banks using national Generally Accepted Accounting Principles (GAAPs), to use the specific templates provided in the EBA Implementing Technical Standards on supervisory reporting. This is consistent with their objective: “In order to ensure consistency and comparability of information, where competent authorities require institutions using national accounting standards to report financial information by virtue of Article 99 (6), these institutions should report financial information in a manner similar to that of institutions using IFRS”. Moreover, for the asset quality review, a qualitative questionnaire that was collected from the banks along with the quantitative template will allow for an informed overview of the bank specific differences throughout the exercise. For the institutions under national GAAPs, further support at each stage of the process is being delivered through the assistance of an on-going help desk.

Regarding your question on the less significant institutions (LSI), Article 6(6) SSM Regulation stipulates that with the exception of common procedures which are a joint responsibility of the ECB and the NCAs, NCAs remain responsible for the day-by-day supervisory activities, but the ECB retains important strategic functions, including regarding initial licensing, withdrawals of licenses and the assessment of acquisitions of qualifying holdings, which are handled jointly by the NCAs and the ECB.

As regards the oversight responsibility of the ECB to ensure that the supervisory activity carried out by the NCAs is of the highest quality and in line with EU and SSM requirements, the ECB will exercise this responsibility with due regard to the principles of proportionality and subsidiarity. These principles stipulate that an intervention of the ECB should only take place when it is necessary, and be as light as possible to address the shortcomings in an adequate way. An example of a direct intervention by the ECB could be in the case that a further detailed assessment is needed with respect to a bank that may be considered to become directly supervised by the ECB.

Finally, you raised questions in relation to the comprehensive assessment. Concerning question 10a, sovereign exposures are within the scope of the comprehensive assessment. This entails the possible inclusion of this asset class in the asset quality review, although given the nature of these exposures, the risk of an adverse AQR finding is relatively low. Sovereign exposures, both held-to-maturity and available-for-sale exposures, will be included in the stress test, although it is not foreseen that HTM portfolios will be marked-to-market. Further details concerning the stress test will be announced in late January or early February.

It is not expected that the asset quality review will impact the regular financial reporting processes related to the closure of year-end accounts. Furthermore, the process of file reviews, to be undertaken in the context of the comprehensive assessment, and by external third parties in close cooperation with NCAs, will not overlap with the regular year-end audit processes. While some elements of the asset quality review may progress in parallel through the bank results reporting season, it is not envisaged that the processes will overlap in any way. The ECB also maintains an on-going dialogue with the audit industry and with ESMA on such matters. More generally, as the results of the asset quality review will only be available in Q4 2014, there is no expectation that the 2013 reporting cycle will be disrupted and there is no expectation that the 2013 results may need to be restated by the banks. Findings from the comprehensive assessment should be carried forward into the 2014 results statement, although precise details in this respect remain under consideration. A possible exception may arise in the unlikely case that the AQR uncovers serious issues that must be addressed according to local law, such as, for example, the identification of accounting irregularities.

Given the high degree of interest in the comprehensive assessment, the demand for information is significant. The risk of leaks through the process is also not inconsiderable, given the scale of the exercise and the number of institutions involved. As a result, very cautious information management processes will be adhered to throughout the process to mitigate the risk of such leaks (question 10.c). Thorough confidentiality rules will apply to the comprehensive assessment in order to ensure that the results are not leaked.

Regarding the question on the relevant accounting standards and the Supervisory Risk Assessment, in Phase 1 of the AQR - similarly to the answer to question 6 - the SSM will not impose IFRS for the banks that report under national accounting standards (question 10.d). We see no inconsistency between the use of consistent definitions of non-performance and forbearance, drawing on the EBA’s ITS/2013/03 definition, and reiterate that current regulations, international or European, will be adhered to in the comprehensive assessment.

For the institutions under the German HGB (question 10.e), as well as for the institutions under other national GAAPs, additional guidance on how to fill in the templates for the previously launched data collections was provided. Support at each stage of the process is being delivered through the assistance of an on-going ‘help desk’ function, managed centrally by the ECB, but with input from each National Competent Authority. Feedback on questions received from the banks has been circulated on a frequent basis to the National Competent Authorities. For the German HGB, specific equivalents and explanations for accounting standards were provided.

Concerning comparability of the findings (question 10.f), consistency and comparability of results is a key aim of the exercise. But that aim should not be interpreted to suggest that a mechanical approach will be applied to each bank under review and that at a portfolio level, the same treatment will be applied across the system. The exercise aims to provide a consistent outcome for each bank and a consistent set of results. This may require that bank-specific and country-specific details will be taken on-board where appropriate, but in keeping with the aims of ensuring consistent and comparable outcomes for the exercise as a whole.

Full letter

Sharon Bowles' letter, 6.12.13

Further reporting © Reuters: Stress test won't ask for govt debt to be marked-to-market -ECB, 14.1.14

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