Exercises conducted by the ECB
i) Results of the 2014 Comprehensive Assessment exercise
Overview and objectives of the Comprehensive Assessment exercise
The ECB conducted the comprehensive assessment exercise in preparation for assuming its banking supervision responsibilities under the SSM for the credit institutions of the euro area in November 2014. The scope of the project was threefold. Specifically, it had to (i) achieve transparency through the enhancement of the quality and quantity of the information related to the real condition of credit institutions, (ii) identify all the measures necessary to remedy for cases of financial and economic weaknesses, and (iii) enhance the confidence of all stakeholders, depositors, markets, and investors towards the solvency of banking institutions of the euro area. The main objective is to safeguard financial stability and enhance the growth prospects of the euro area economy.
The comprehensive assessment covered 130 credit institutions with assets of €22.1 trillion, which accounts for 81.6% of total banking assets in the SSM. The exercise was extremely extended in time and in size as it took one year to be completed, covered the examination of every portfolio of every participating bank, and involved the ECB-SSM network, all the relevant national competent authorities, the EBA, and third party experts. In total, more than 6,000 individuals were involved.
The uniform application of a detailed methodology across all the credit institutions was of the utmost importance in order to achieve consistency of the information on euro area banks and to ensure level playing field conditions.
The four Greek credit institutions that took part in the comprehensive assessment were Alpha Bank S.A., Eurobank Ergasias S.A., National Bank of Greece S.A., and Piraeus Bank S.A. These banks are supervised by ECB directly after November 4, 2014.
Methodology of the Comprehensive Assessment exercise
The comprehensive assessment consisted of two components:
1. A thorough and detailed asset quality review (AQR) which was a bottom-up approach for examining banks’ assets. The review was a point-in-time assessment of the accuracy of the carrying value of banks’ assets as of 31 December 2013 and provided a starting point for the stress test. The AQR was undertaken by the ECB and the national competent authorities and was based on the CRR/CRD IV definition of regulatory capital as of 1 January 2014 with a minimum CET 1 ratio of 8.0%.
2. A top-down forward-looking stress test which examined the resilience of banks’ solvency under two hypothetical scenarios, baseline (hurdle rate of 8.0% CET1) and adverse (hurdle rate of 5.5% CET1). The scenarios covered the period of 2014-2016 and were developed jointly with the European Commission, the ESRB, and the ECB. The exercise was carried out on the basis of consolidated year-end 2013 figures and also incorporated the new information arising from the AQR.
Because the restructuring plans of the Greek banks had not been officially approved and published before 31/12/2013, Greek banks implemented the “static balance sheet” assumption, in line with the EBA methodology. However, all four Greek banks were implementing restructuring plans in the course of 2014 and these plans had been officially approved by the European Commission. Since the static balance sheet projections are not fully representative of these banks’ capital positions, they also performed the exercise under the “dynamic balance sheet” approach, which for some other banks participating in the exercise was the only approach followed. The dynamic balance sheets have been subjected to an equal level of robust Quality Assurance with that performed on the static balance sheet.
More specifically, in the static balance sheet assumption, a zero growth assumption applies on a solo, sub‐consolidated, and consolidated basis for both the baseline scenario as well as the adverse scenario. Furthermore, it is assumed in the exercise that banks maintain the same business mix and model (geographical, product strategies, and operations) throughout the time horizon. The dynamic balance sheet incorporates the restructuring plans that have been assessed and approved by the EU DG Competition, while following EBA methodology to ensure a level playing field. A number of banks’ commitments are embedded in the restructuring plans, including disposal of assets and subsidiaries, reduction of operating expenses, and reduction in the cost of deposits. Additionally, capital raising measures to date are incorporated into the projections. Dynamic balance sheet stress test results reflect the projected capital position under the restructuring plans that the banks are already implementing, and as such they will be taken into account by Joint Supervisory Teams (JST) in determining the banks’ final capital requirements.
All banks facing a capital shortfall arising from the Comprehensive Assessment are to submit capital plans within two weeks of this disclosure detailing how the shortfall will be covered, which will then be assessed by the JSTs.
The results of the exercise do not include the (positive) impact from the recent legislation that allows Greek banks to convert part of their deferred tax assets (DTAs) into deferred tax credits (DTCs).
Aggregate results for Greek Banks
Three of the four Greek credit institutions that took part in the Comprehensive Assessment had no capital shortfall under the relevant dynamic balance sheet assumption and the fourth bank had practically no shortfall.
Under the static balance sheet assumption, Alpha Bank S.A. had no capital shortfall, while Piraeus Bank S.A. had a capital shortfall that was more than covered by the capital raising performed in 2014 (net of repayment of preference shares).
Under the static balance sheet assumption, National Bank of Greece S.A. and Eurobank Ergasias S.A. had a capital shortfall that was not fully covered by the share capital increases performed in 2014. However, as stated in the aggregate report on the Comprehensive Assessment: “[these] banks … will have dynamic balance sheet projections (which have been performed alongside the static balance sheet assessment as restructuring plans were agreed with DG-COMP after 1 January 2014) taken into account by the JSTs in determining their final capital requirements. Under the dynamic balance sheet assumption, one bank has no shortfall and one bank has practically no shortfall. Under the dynamic balance sheet assumption, one bank (National Bank of Greece S.A.) has no shortfall and one bank (Eurobank Ergasias S.A.) has practically no shortfall”.
The results of this exercise provide confirmation that the capital raising and restructuring plans implemented by the four Greek banks have significantly strengthened their capital positions.
The detailed results are available on the ECB’s website (https://www.bankingsupervision.europa.eu/banking/comprehensive/html/index.en.html).