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Assessing risks and

ensuring transparency in

the EU banking sector

The EBA is mandated to monitor and assess

market developments, as well as to identify

trends, potential risks and vulnerabilities across

the EU banking system. In 2014, the EBA’s risk

assessment infrastructure was strengthened

with some significant developments as a cen-

tral EU data hub, harnessing new reporting

requirements to improve its key risk indicators

and suite of regular risk products, undertaking

thematic work on RWA consistency and coordi-

nating the Union-wide stress test assessment

of the largest EU banks.

The EBA as a data hub

For the first time, the EBA developed and

rolled out a single set of supervisory reporting

standards in the form of Common Reporting

Requirements (COREP) and Financial Report-

ing Requirements (FINREP). The standards

provided information on banks’ own funds

(COREP) and balance sheet data (FINREP)

to be reprinted consistently and held in one

place. The EBA shared micro-prudential data

of individual banks among competent authori-

ties, and supervisors were able to join a shared

database on a voluntary basis and share and

receive Key Risk Indicators (KRIs) of banks in

the EBA sample. The Memorandum of Under-

standing (MoU) will be updated in early 2015

and is planned to cover all supervisors.

EU-wide stress test

To help ensure stability and restore confidence

in the banking system, the EBA conducts EU-

wide stress testing exercises. The objective

is to assess the resilience of EU banks to ad-

verse economic developments, to help super-

visors assess individual banks, to contribute

to understanding systemic risk in the EU and

ultimately to foster market discipline in the

sector. The EBA conducted an exercise in 2014

based on common macroeconomic scenarios

and a consistent methodology, and it was ac-

companied by the provision of unparalleled

transparency into banks’ balance sheets and

into the potential impact of severe, but plau-

sible, shocks on them. The EBA collected and

processed about 9.6 million data points for 123

banks across the entire EU and the results of

the stress test were published in October 2014.

One difference from previous stress tests was

that the participating banks had to undergo an

asset quality review (AQR). The AQR was a ma-

jor step forward for the EBA’s work on com-

mon definitions and comparability, as the ex-

ercise used the EBA’s harmonised definitions

of non-performing and forborne exposures.

The impact of the stress test was assessed in

terms of the transitional CRR/CRD IV Com-

mon Equity Tier 1 (CET1) capital ratio for which

5.5 % and 8.0 % hurdle rates were defined for

the adverse and the baseline scenario, re-

spectively. As of the end of 2013, the weighted

average CET1 capital ratio was 11.1 % and, in

the adverse scenario, it was projected to fall by

approximately 260 bps, mostly driven by credit


The test found that 24 participating banks fell

below the defined thresholds leading to an

aggregate maximum capital shortfall of EUR

24.6 billion. However, the additional capital

raised in 2014 by banks with a shortfall re-

duced their capital needs to EUR 9.5 billion

and the number of banks with a shortfall to 14.

The supervisory reaction for individual banks

based on these results was the responsibility

of competent authorities.

Work of shadow banking

In 2014, the EBA carried out a comprehensive

study into the interpretation of the term ‘credit

institution’, which is used in all key pieces of

Union banking legislation, including the CRD

IV and the CRR, the BRRD and the SSM and

SRM regulations. In 2015, the EBA is planning

to undertake a range of other work in relation

to shadow banking, including the preparation of

guidelines on exposure limits to shadow bank-

ing entities under Article 395(2) of the CRR.