Overview EU-wide Stress Test 2014 Mario Quagliariello – Head of the Risk Analysis Unit

23/05/2014 - Executive Banking Briefing - Athens

Agenda 1

Context

2

Key features

3

Quantification of different risk types

4

Process and time line

2

Supervisory stress testing in the EU 2014: Where are we? EU-wide stress test 2011  Pre-emptive capital raising  Credit sensitivities  Disclosure (capital and sovereign)

EU-wide recapitalisation

 9% after sovereign buffer  EUR 204bn capital raised  CT1 ratio comparable to US  EU CT1 sufficient if RWA can be trusted

EU-wide stress test 2014

AQRs  EBA recommendation  Common definition of NPL  CAs responsibility  PIT assessment of capital to recapitalise

 Forward looking assessment and reaction function

Focus today

RWA consistency  Ongoing, leading to supervisory consistency, transparency and benchmarking 3

3. EBA stress testing – towards 2014 EBA Core Tier 1 capital ratio dispersion measures (median, average, interquartile range, 5th and 95th percentiles)

Motivation: Multi country – multi institution Motivation

Components of EU-wide stress test

 Comprehensive, consistent and relevant scenario

Microeconomic perspective  Assessing cross border groups Why?

 Comparability across markets

Tools

Macroeconomic perspective  Concentrations and correlations

 Constrained bottom-up methodology (key features, risk quantification, templates)

 Systemic shocks Transparency

 Detailed disclosure to inform supervisors and market participants

 Consistent, relevant and efficient EU-wide stress test What?

 124 consolidated banks, 28 jurisdictions, 80% of total assets in the EU

Cooperation

 Cooperation amongst supervisors and other involved parties

5

The suite of stress tests

Type

Aim

Use System-wide microprudential stress tests

Firms

Firms own stress testing

Risk analysis

Supervisors

Micro prudential stress tests under pillars 1 and 2

bank-by-bank information on risks and vulnerabilities

Supervisory analysis; early warning tools

Macro economic stress tests;

Aggregated information on systemic risks and vulnerabilities

Systemic stability, economic policy implications

Macro prudential authorities

System-wide macro prudential stress tests

Banks’ risk management

•Hybrid in methods and aims; multiple use •Focused on sample bottom up stress test •Focused on sample top down stress tests •Focused on comparability

6

Agenda 1

Context

2

Key features

3

Quantification of different risk types

4

Process and time line

7

Overview key features (1/2) Consolidation

Scenario

Time-horizon and reference date

Capital

• Highest level of consolidation • Perimeter of the banking group as defined by the CRD/CRR

• Common baseline and adverse macro-economic scenarios and stressed market parameters for positions sensitive to a change of market prices • CAs may develop additional sensitivities to incorporate country specific features

• Consolidated year-end 2013 figures • Scenarios applied over a period of three years (from 2014 to 2016)

• CET1, with transitional arrangements; CoCos reported if trigger is above the bank’s CET1 ratio in the adverse scenario • CAs may, in addition, assess the impact of the stress test on other yardsticks • Prudential filters are discretion of CAs; conditions for common approach assessed

8

Overview key features (2/2) Hurdle rate

• 8% Common Equity Tier 1 ratio for the baseline scenario • 5.5% Common Equity Tier 1 ratio for the adverse scenario • CA may calibrate possible supervisory measures based on a ladder of intervention points and set higher hurdle rates

Static balance sheet

• Zero growth assumption for baseline and adverse scenario and same business mix • Assets and liabilities that mature replaced with similar financial instruments in terms of type, credit quality and original maturity; no workout of defaulted assets • Exemption due to mandatory restructuring plans announced before reference date

Risk coverage

• Solvency stress test – credit risk, market risk, sovereign risk, securitisation, cost of funding, non-interest income and costs, operational risk; no liquidity stress test • CAs may include additional risks but results reported under common approach

Process

• EBA responsible for common methodology, templates, disclosure • Competent authorities responsible for quality assurance and reaction function • Outcome of AQR may inform starting point

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Agenda 1

Context

2

Key features

3

Quantification of different risk types

4

Process and time line

10

Overview credit risk methodology Scope

• All assets in the banking book which are exposed to credit risk including counterparty credit risk, on and off-balance sheet positions, IRB and STA portfolios • Methodology also applied to IRC

Methodology

• Stressed point-in-time PD and point-in-time LGD for provisioning • Potential rating migration and stressed IRB regulatory parameters for RWA

Impact on P&L

• Expected loss based on point-in-time parameters used to calculate credit risk losses on performing portfolio • Additional losses on defaulted portfolio based on worsening LGDs and portfolio characteristics

Impact of RWA

• Stressed RWA in IRB and STA, including RWA for defaulted assets and IRB excess or shortfall • RWA floored at 2013 levels

11

Overview market risk methodology Scope

• All financial assets and liabilities assessed at fair value (positions in HfT, AfS and designated at fair value through profit and loss portfolios) • Hedge accounting portfolios • Securitisations held at fair value

Methodology

• Simplified: bank-specific reduction in NTI based on historical variation • Comprehensive: full revaluation of positions based on market risk parameters • CVA haircuts for OTC derivatives • Default of largest counterparty (excl. CCP, market infrastructure, sovereign)

Impact on P&L

• Reduction in NTI or other comprehensive income impact due to fair value variation; loss from default of largest counterparty; loss from CVA haircuts • Valuation adjustments on debt securities and P&L gains resulting from credit spread widening of own liabilities cannot be taken into account

Impact of RWA

• RWA increase for VaR, SVaR and CRM capital charges due to predefined assumptions (constant RWA for banks using simplified approach; VaR replaced by SVaR for banks using comprehensive approach, fixed scaling for CRM) • IRC and CVA increase due to worsened risk parameters

12

Overview securitisation risk methodology Scope

• Securitisation and re-securitisation positions assessed at fair value (HfT, AfS, designated at fair value through profit and loss) and amortised cost positions

Methodology

• Increase of RWA depending on risk profile of the positions (three risk buckets) • Impairment estimates for positions not held for trading • Application of market risk methodology for fair value positions

Impact on P&L

• Impairments for securitisation positions not held for trading • Mark-to-market treatment for positions at fair value in line with market risk methodology

Impact of RWA

• RWA increase for all securitisation positions based on pre-defined risk buckets

13

Overview cost of funding and interest income

Scope

• Interest bearing assets and liabilities

Methodology

• Sensitivity analysis of the P&L effect for deterioration in wholesale funding markets and a significant increase in retail funding costs • Banks’ own estimates but subject to constraints • Asymmetric pass-through • LTRO replaced with MRO

Impact on P&L

• Increase of cost of funding partially mitigated by an increase in interest income

Impact of RWA

• N/A

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Overview sovereign risk methodology Scope

• Sovereign exposures (direct debt exposures as well as indirect exposures to central and local governments) • Assessed at fair value (HfT, AfS, fair value through profit and loss) and amortised cost positions

Methodology

• All fair value positions: application of market risk methodology for impact of changes in market prices • Regulatory banking book positions: application of credit risk methodology for impairment estimates based on rating migration defined by ESRB/ECB

Impact on P&L

• Direct P&L impact for positions accounted for at fair value (with AFS prudential filters phased out 20/40/60%) • Further impairment estimates for regulatory banking book assets

Impact of RWA

• RWA increase due to worsened risk parameters in IRB and STA

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Agenda 1

Context

2

Key features

3

Quantification of different risk types

4

Process and time line

16

Overview responsibilities Common methodology, templates Data hub for final dissemination

European Systemic Risk Board European Commission

•

Common scenario (in cooperation with ECB, NCAs)

28 Nations, 28 National Supervisory Authorities and ECB

• •

Responsibility for the quality assurance Assessment of the reliability and robustness of banks’ assumptions, data, estimates and results Definition and communication of any additional sensitivities Supervisory reaction function

Non-SSM National Competent Authorities

SSM ECB, National Competent Authorities

• •

Joint work and information sharing

• •

European Banking Authority

124 banks in 2014 EU-wide stress test • 20 Non-SSM banks

104 SSM banks

Calculation of bottom-up stress test results

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Tentative time line April

Preparation

Calculation

May

June

July

August

September

October

Finalisation methodology, templates, scenario

Advance data collection

Iteration with banks

ST calculation by banks

Disclosure

Disclosure preparation

29/04/14 Publication methodology, templates, scenario

Workshop with banks

Submission first results to EBA via CAs

EBA feedback on results to CAs

Publication of results

Milestones Publication ECB benchmarks

Submission close-tofinal results to EBA

18

Overview disclosure P&L

• Main P&L items like net interest income, net trading income, impairments for financial assets and other comprehensive income

Credit risk

• Exposure, RWA, value adjustments and provisions, default and loss rates • No disclosure of credit risk parameter

Market risk

• Market risk position by main risk types

Securitisation

Sovereign

RWA

Capital

• Securitisation exposure, RWA and impairments

• Sovereign exposure by country, maturity and accounting treatment

• RWA by risk type • Capital position, components and adequacy including stressed solvency ratios • Capital restructuring 19

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