ECB to limit bank stress tests input

The ECB plans to limit the amount of data it carries over from an ongoing asset review into a subsequent stress test as it tries to manage the burden from its unprecedented health check of eurozone lenders.

Instead of entering all loan values obtained in the asset quality review that ends this month into its stress test, officials will apply a “materiality threshold” to ensure only significant results are incorporated, according to a draft ECB document seen by Bloomberg News.

Regulators have yet to sign off on the methodology, including a definition for that term. ECB officials have vaunted the credibility of the stress test that it is conducting with the European Banking Authority compared with previous exercises, citing the use of scrubbed data from 160,000 credit files to enhance its reliability.

The document, scheduled for publication on Thursday, shows the degree of pragmatism the ECB is applying as it tries to square a desire for methodological rigor with a schedule to start supervising around 120 banks in November.

“The ECB plans to publish the manual for the join-up of the asset quality review and the stress test in August, and it will include the definition of the materiality threshold,” the ECB said in a statement.

The stress test pits bank balance sheets against a range of negative, hypothetical economic events to gauge their robustness, and are designed to help the ECB take over supervision with a clear picture of the banking system’s health.

The ECB’s supervisory board is due to meet next week to sign off on the methodology for joining up the asset quality review and the stress test. Banks, which have submitted templates on how they assume the negative scenarios will affect balance sheets, will be required to adjust their numbers after a review by the ECB.

Lenders across the eurozone are taking part in the exercise, which started last November. By late October, the ECB will release results that show a detailed picture of bank capital levels and provisioning, as well as a level of harmonized data on non-performing loans that has never before been available.

To avoid a “disorderly publication of the outcome of the comprehensive assessment”, results will be given “very close to the public disclosure in order not to create disclosure obligations under the securities market regulation”, the document reveals.

— Bloomberg