EBA recommends supervisors to conduct asset quality reviews and adjusts the next EU-wide stress test timeline

The EBA agreed today on recommendations to supervisors to conduct asset quality reviews on major EU banks. While banks' capital positions were significantly strengthened under the EBA's recapitalisation exercise, the objective of the asset quality exercises will be to review banks' classifications and valuations of their assets so to help dispel concerns over the deterioration of asset quality due to macroeconomic conditions in Europe.

Since appropriately reviewed balance sheets are a key input to an effective stress test, the EBA has also adjusted the timeline of the next EU-wide stress test so to conduct the exercise in 2014 once the asset quality reviews are completed. However, to ensure transparency and comparability over the years, the EBA will provide, in the second half of 2013, appropriate disclosure on the actual exposures of the EU banking sector.

The EBA underlines the importance of taking into account and supporting the work on the review of banks' assets and, in particular, of ensuring alignment in methodologies and timeline with the balance sheet assessment of the Single Supervisory Mechanism (SSM) to be conducted under the aegis of the European Central Bank.

In this respect, the set of EBA recommendations and the timeframe for the asset quality reviews and the EU-wide stress test will be published once the timeline of the SSM's balance sheet assessment is known.

Asset quality reviews remain under the responsibility of the relevant competent authorities and have already been undertaken in some jurisdictions. The EBA's recommendations will, therefore, aim at contributing to a more uniform approach in the methodology of the reviews, through a set of good practices, and to a consistent communication on the outcomes of national exercises.

Andrea Enria, Chairperson of the European Banking Authority, said: "Our recapitalisation recommendations have brought the common equity capital ratios of EU banks in line with those of major international competitors. However, concerns remain on asset quality and forbearance, which need to be addressed. This is also a necessary precondition for the credibility of the next EU-wide stress test."