EBA’s emphasis on consistent national data and
results for its upcoming stress test will be examined on
Sunday, when the ECB and EBA reveal how banks fared.
some EU countries are subjected to stricter rules than those in
others when calculating common equity tier 1 (CET1).
This is due
to transitional rules for the implementation of the Capital
Requirements Directive (CRR). Those transitional rules can vary
across jurisdictions and are largely taken into account for the
purpose of the stress tests.
When the EBA and ECB release the results of the stress
test and the comprehensive assessment on October 26, market
participants will initially focus on three headline figures for
banks: the CET1 ratio calculated for the asset quality review
(AQR), a baseline scenario, and an adverse scenario.
of CET1 and risk-weighted-assets (RWA) are the key metrics that
determine whether a bank fails or passes the stress test.
determines the quality of the banks’ assets. The
baseline scenario assumes economic development in line with EC
projections until 2016, including GDP growth of 1.5% in 2014,
2% in 2015, and 1.8% in 2016.
scenario assumes a deterioration in macroeconomic developments,
including a decline of real GDP in the EU by 0.7% in 2014 and
1.5% in 2015, before rising by 0.1% in 2016. Employment falls
significantly during that period.
pass the comprehensive assessment if their results show a CET1
ratio of at least 8% for the AQR and the baseline scenario, and
of 5.5% for the adverse scenario.
But for the
time being, banks in different EU member states do not
necessarily calculate their CET1 capital on the same grounds,
and it will take years before a level playing field is
member states decide to what extent certain assets are
accounted for in regulatory capital during transitional
a result CET1 ratios are not calculated on the same basis in
all member states
limits direct comparability of stress test results, although
large improvements have been made over previous
Deferred tax assets
The most prominent example is the treatment of
deferred tax assets (DTAs), where national rules are still
exclusion of DTAs from CET1 is being phased out, but the CRR
gives member states certain discretion about the speed of their
members have chosen the most bank-friendly approach: a slow
phase-in, starting at 10% in 2015 and increasing by 10%
annually until reaching 100% from 2024. France, Germany,
Ireland, Italy, the Netherlands, and Spain are among the
countries that have chosen this path.
however, has skipped the transition entirely, with banks having
to fully include DTAs in their calculations as of January 1
2014. In Denmark banks also need to fully take DTAs into
account. And Luxembourg has opted for an accelerated phase-in
of DTAs at a rate of 20% in 2014, 40% in 2015, and so on until
reaching 100% from 2018.
differences in AFS
But there is one notable exception of the rule that
CRR national discretions are acknowledged in the tests: the
treatment of available-for-sale securities (AFS).
France, Ireland, Italy, Luxembourg and Spain losses from
sovereign bonds held in the AFS portfolio are filtered out when
treatment will continue until the European fair value
accounting rule IAS 39 is replaced. This was due in 2015 but
has now been pushed back to at least 2017.
Netherlands has chosen to remove the filter over the coming
years. In 2014 the AFS filter has been reduced to 80%, and in
2015 and 2016 – that is, within the timeframe of the
baseline and the adverse scenario – it will shrink
further to 60% and 40% respectively.
UK’s regulator, the Prudential Regulatory
Authority (PRA) announcend in December 2013 that in most cases
a filter on AFS central government debt would be inappropriate
because it would misstate the underlying solvency of the firm.
The PRA said banks could still apply for permission to filter
and each case would be considered individually.
But for the
purpose of calculating capital in the stress test this member
state discretion has been ignored: irrespective of the
differences across countries the sovereign risk held as AFS is
treated in the same way in the exercise.
significant, because the amount of sovereign debt held as AFS
varies widely from bank to bank.
Acharya, economics professor at the New York University Stern
School of Business, and Sascha Steffen, associate professor of
finance at the European School of Management and Technology in
Berlin, compared data from banks in Spain, Greece, Ireland,
Italy, and Portugal.
research, based on June 2013 figures, shows that within this
group banks in Spain and Italy had by far the highest amount of
sovereign bonds in their AFS portfolio.
Intesa held €49.66 billion ($62.87 billion) as AFS (and
€31.35 billion as HTM and €5.99 billion in trading),
and Spanish Santander held €42.38 billion as AFS (and
€22.33 billion HTM and €5.47 billion trading).
(€39.45 billion AFS, €12.01 billion HTM and
€6.56 billion trading) and BBVA (€21.93 billion AFS,
€38.5 billion HTM and €4.95 billion trading) came in
at third and fourth place respectively.
comparison, Europe’s largest bank, HSBC, only has
€350 million of sovereign bonds as AFS, and the second
largest player, Deutsche Bank, has €1.31 billion. BNP
Paribas’ €13.84 billion make it the
second-largest holder of sovereign bonds as AFS among
Europe’s ten biggest banks. But
that’s still less than a third compared with
Santander, Europe’s eight’s biggest
that some bank’s regulatory capital would look
considerably stronger if sovereign debt held as
available-for-sale was excluded from capital.
Hellmich, professor for risk management at Frankfurt School of
Finance & Management, says that capital ratios have never
been directly comparable across EU countries – neither
in past tests, nor in the 2014 exercise.
steps in the right direction to improve comparability have been
taken. The AQR, the EBA single rulebook, the ECB’s
direct supervision of significant banks and the introduction of
joint supervisory teams as well as the introduction of leverage
ratio requirements will all help the process. "But we are still
far away from being able to directly compare the numbers," says
EBA and ECB
acknowledge that there are differences in CET1 calculations and
that transitional arrangements are taken into account for that
But the EBA
also promised some clarity about this in the data as it will be
published on Sunday. "In the legal framework competent
authorities have the discretion, as per the CRR/CRD IV, to
filter out unrealised losses," an EBA paper states. "Either
choice will be clear in the transparency of the results."