ECB comprehensive assessment: Finnish banks’ capital adequacy remained good also in the stress scenario
The Finnish banks included in the comprehensive assessment of the European Central Bank maintained good levels of capital adequacy, also in the adverse macroeconomic scenario.
‘The capital adequacy of all the Finnish banks involved clearly exceeded the capital ratio thresholds defined in the assessment. In the adverse scenario, the Finnish banks’ Common Equity Tier 1 capital ratio remained higher than the average for the assessed banks and the aggregate adjustment to capital ratios was on average level. The result will further enhance consumer confidence in the Finnish banking sector,’ says Anneli Tuominen, Director General of the Financial Supervisory Authority.
The Finnish banks subject to the comprehensive assessment were Danske Bank Plc (Finland), Nordea Bank Finland Group and OP-Pohjola Group.
The comprehensive assessment was undertaken as a commensurate review of the condition of the banks that are due to come under joint ECB supervision. ‘The comprehensive assessment revealed differences in practises of the euro area countries in valuation of the balance sheet items,’ notes Director General Tuominen. ‘The asset quality review conducted on harmonised criteria finally enables assessment of European banks with the same yardstick,’ says Director General Tuominen. ‘This provides a good starting point for building single European banking supervision, in which national supervisors will also continue to play an important role.’
Transparency and stronger bank balance sheets as a goal
The comprehensive assessment aims to increase the transparency of bank balance sheets and to strengthen the capital base, if necessary. Both of these goals also help foster confidence in banking activity. Banks will be required to acquire more capital if the comprehensive assessment identifies capital shortfalls.
The comprehensive assessment comprises an asset quality review and a stress test incorporating country-specific features and based on the asset quality review. The comprehensive assessment sets the Common Equity Tier 1 capital threshold at 8% for the asset quality review and the baseline scenario and at 5.5% for the adverse scenario. If banks fall below these thresholds, recapitalisation measures will be required.
Impact of the comprehensive assessment on Finnish banks’ Common Equity Tier 1 (CET1) capital ratio
|Danske Bank Plc Group
- CET1 ratio at year end 2013
|- CET1 ratio at year end 2013 following asset quality review (threshold 8%)
|- Lowest CET1 ratio in the adverse scenario (threshold 5.5 %)
|- Aggregate adjustment to CET1 ratio in the comprehensive assessment
The CET1 capital ratio for the Finnish banks, on a bank by bank basis, declined compared with year end 2013 in the adverse scenario by 1.8–5.1 percentage points to 10.4–13.4%. These ratios clearly exceed the CET1 threshold of 5.5%.
Asset quality review
Bank-specific declines in the end-2013 CET1 capital ratio due to the outcome of the asset quality review were in the range of 0.3–0.7 percentage points. The drivers of the outcome of the asset quality review varied across banks. The largest reductions in CET1 capital resulted from growth in provisions required for collectively and individually assessed exposures and for counterparty risks for derivatives (CVA calculation). In connection with the collective provisioning and CVA calculation, the banks’ own calculations were compared with the ECB challenger model and the provisions were adjusted on the basis of this comparison. The asset quality review was conducted in terms of the harmonised European definition of non-performing exposures, which was broader than the definition used in Finland at the end of 2013. This was one contributor to the growth of non-performing exposures.
The stress test reviewed the evolution of the banks’ capital adequacy in two different macroeconomic scenarios, with projections extending until the end of 2016. The capital adequacy of all the three Finnish banks improved in the baseline scenario, but weakened in the adverse scenario. The main effects on capital adequacy in the stress test were due to growth in risk-weighted assets and impairments. Differences between the Finnish banks are largely accounted for by different business structures.
Simultaneously with the disclosure of ECB comprehensive assessment results, EBA EU-wide stress test results for banks were published. The results of the banks that participated in the ECB comprehensive assessment are not fully comparable with the results of other banks in the EBA stress test. The ECB’s detailed guidance for the asset quality review and the ECB’s quality assurance only applied to banks coming under ECB supervision.
Requests for interviews
- For interviews with Anneli Tuominen, Director General, and Jyri Helenius, Head of Department, please contact: Terhi Lambert-Karjalainen, Head of Communications, tel. +358 50 351 9574
- Presentation material for FIN-FSA press briefing (in Finnish, pdf)
- ECB press release
- ECB disclosure of comprehensive assessment results
- Instructions for how to use the disclosure templates (video presentation, 4:17 min)
- English-language disclosure template model (excl. figures) (excel)
- Aggregate report on the comprehensive assessment (pdf)
- AQR basic phases and related manual