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The thrust for the design of such a fundamental reform as the Banking Union in the economic governance of the European Union has come from the crisis, both international and European. The eurozone financial and sovereign debt crisis has shown the shortcomings of the European institutional framework, triggering a wave of reforms that would, otherwise, most probably, not have taken place.
Mr Linde concluded with some comments on the comprehensive assessment of all banks that will come under direct ECB supervision. This will consist of three elements: a supervisory risk assessment, a balance sheet assessment and a stress test, and shall be concluded before the ECB assumes its supervisory functions in a year from now.
The Supervisory Risk Assessment will incorporate supervisory judgement on all risk factors, aiming to evaluate measures and summarise in a comparable form across banks all potential sources of risk. This risk assessment will also be used for the portfolio selection to be undertaken as part of the balance sheet assessment.
The second element, the Balance Sheet Assessment, will be carried out at a given point in time and on an accounting basis. This assessment will be broad and inclusive, covering credit and market exposures, on and off-balance sheet positions, domestic and significant non-domestic exposures. One key issue is going to be the capital threshold used for this exercise, which, in accordance with the definitions of the Capital Requirements Regulation and Capital Requirement Directive IV, based on Basel III recommendations, will take into account the need for a demanding threshold. The main content and details of this exercise will be made public in the next few days.
The third element, the Stress Test, will review the major risks of banking groups under various scenarios, testing the sensitivity of bank balance sheets to hypothetical external shocks. The features of the stress test will be defined in conjunction with the EBA, and publicly disclosed at a later stage.
The results of the assessment will be published once finished and prior to the ECB assuming its supervisory role.
The ECB will manage and oversee the exercise in close cooperation with the National Authorities and with the support of an international consultancy firm. The National Authorities will conduct the exercise at the national level, on the basis of data requirements and centrally developed methodology, and may ask for the support of third parties if they deem it necessary. To ensure consistency in execution across banks and countries, quality assurance processes will be in place at every stage. It is in the interest of all that this exercise be rigorous and transparent, so as to fully restore confidence in the European banking sector.
We have in front of us a year “fully loaded” – to use the jargon we all use in connection with of the Regulatory Basel Framework. The European Union is trying to make a big step forward and we will need the intelligence and best cooperation of all for this great design to be carried out.