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c. Asset quality and risk-weighted assets
Following on from the recapitalisation exer-
cise, and as part of its efforts to assist in re-
storing confidence in banks’ balance sheets
and hastening the process of repair, the EBA
took steps for addressing uncertainty on the
consistency of risk-weighted assets (RWAs).
The issue of the dispersion in the estimates of
credit risk parameters across banks had been
already flagged in the report on the results of
the 2011 EU-wide stress test.
During 2012, the EBA undertook significant
work in assessing the consistency of RWAs.
Differences in risk parameters and capital re-
quirements between banks are not a sign of
inconsistency per se. For example, the com-
position of portfolios and so the underlying
risk profile may differ across banks as a result
of differences in markets (e.g. geography), risk
appetite or borrower selection criteria. How-
ever, a substantial divergence between banks
may signal that the methodologies used for
estimating risk parameters by some banks
will require further analysis regarding the
drivers and potential explanations for those
Initially, the EBA focused its analysis on credit
risk, mainly IRB, postponing the work on the
trading book. The work covered analysis of the
risk parameter estimates used in the RWA and
expected loss (EL) calculations and investigat-
ed to what extent any differences may reflect
individual experience and risk management
practices, different features of the internal
models, and/or varying interpretation/practi-
cal application of the capital requirements dir­
ective (CRD). Some attention has been given
to the computation of RWAs under the stand-
ardised approach, with particular reference to
risk classification, usage of external ratings
(ECAIs) and credit risk mitigation techniques.
The other aspect of confidence in banks’ bal-
ance sheets has been questions about the un-
derlying asset quality. Although the EBA does
not have responsibility for assessing asset
quality in individual banks it has been work-
ing to support the work of relevant competent
authorities in this regard. One notable step
forward was EBA work, initiated in late 2012,
to provide common definitions on forbearance
and non-performing loans. The definitions will
provide supervisors and colleges with a tool
to monitor asset quality of banks’ books on a
common basis, and will provide crucial input
to future stress tests.
d. Bank funding
Concerns about bank funding have focused
not only on banks’ efforts to restore private
funding but the implications of the narrowing
of the funding market for banks’ future bal-
ance sheets. To better understand the chal-
lenges the EBA worked closely with the ESRB
to assess funding conditions with a focus on
asset encumbrance. In particular, the Ex-
pert Group on Bank Funding, chaired by the
EBA, collected granular data that allowed an
in-depth analysis and the identification of a
­series of policy recommendations that were
approved in December 2012.
The analysis showed an increase in asset en-
cumbrance along with wide dispersion across
institutions, highlighting the need for effective
management by the banks and monitoring by
both banks and NSAs. The ESRB recommend-
ed that the EBA produces harmonised defi-
nitions and templates both for funding plans
and asset encumbrance that will allow regula-
tory reporting and assessment on a common
­basis. Furthermore, the EBA has been asked to
produce guidelines on transparency require-
ments and coordinate the identification of best
practices regarding covered bonds and other
instruments that generate encumbrance.
The fulfilment of the recommendation on as-
set encumbrance templates is largely com-
plete, and the EBA is starting work on the
development of funding plan templates. The
recommendations will be pursued by the EBA
over the next few years, in tandem with guide-
lines for the supervisory review and evaluation
process (SREP) for liquidity, so that European
supervisors can monitor and assess bank
funding on a common basis.
e. Euribor investigation
A joint EBA/ESMA work addressed governance
aspects of the Euribor rate setting mechanism
and complemented the legal investigations
related to Libor/Euribor being conducted by
competent authorities within the EU in 2012.