What is the comprehensive assessment and why is it carried out?

Published: 3/6/2020

Before the establishment of close cooperation, the ECB carries out a comprehensive assessment of the banks in the country that wishes to enter into close cooperation. The assessment is a precondition for the establishment of close cooperation and is performed to enhance the quality of information available on the condition of banks, identify problems and implement the necessary corrective actions, and assess whether the banks are fundamentally sound. The comprehensive assessment is not aimed at identifying illegal activity.

The comprehensive assessment consists of (i) an asset quality review to enhance transparency regarding the banks’ exposures, including the adequacy of asset and collateral valuations and related provisions, and (ii) a stress test, which is used to assess the resilience of the banks’ balance sheets under a stressed macroeconomic scenario, typically including an economic downturn.

Both components focus mainly on risk in relation to capital. Other risk areas, such as liquidity risk and operational risk, and prevention of money laundering are not included in the scope of the exercise.

The final results of the comprehensive assessment are based on the outcome of both the asset quality review and the stress test. In order for banks to pass the test, the ECB must verify that they have sufficient capital to meet the minimum requirements listed below:

  • common equity tier 1 (CET1) ratio has to be above 8% under the baseline scenario; and
  • common equity tier 1 (CET1) ratio has to be above 5.5% under the adverse scenario.