EBA Recommendations on asset quality reviews

Recommendations on asset quality reviews
EBA/REC/2013/04
21/10/2013

Recommendations on asset quality reviews
Table of contents

1. Executive Summary 3

2. Background and rationale 5

3. EBA recommendations on asset quality reviews 6
   Annex I – List of Competent Authorities 9
   Annex II - Good Practices on performing asset quality reviews 11

4. Confirmation of compliance Recommendation 17

5. Executive summary
   As part of a continued effort to restore confidence in the EU banking sector, the EBA is issuing recommendations to competent authorities requiring participating competent authorities to undertake asset quality reviews (AQRs) of asset classes considered to be high risk. The objective of the recommendations is to contribute to a more uniform approach in competent authorities’ evaluations of banks’ credit portfolios, including risk classification and provisioning, in order to support sufficiently prudent capital levels and provisions to cover the risks associated with these exposures. These recommendations promote consistency to the process and outcomes of AQRs at the European level so that remaining doubts about the quality of assets across the EU may be alleviated. The AQRs remain under the responsibility of the competent authorities. Competent authorities are recommended to assess and identify high risk asset classes in banks´ credit portfolios. This assessment, which should be shared with relevant colleges of supervisors, should ensure that risky portfolios are properly assessed for each reviewed bank. With these recommendations the EBA intends to provide some consistency and coordination in the good practices to be voluntarily followed by the competent authorities. These recommendations are designed to work with existing and/or planned work on AQRs. The work of the single supervisory mechanism (SSM) and its plans for a balance sheet assessment should be supported but not constrained. These recommendations will ensure sufficient space for the SSM and other competent authorities to clarify the objectives, timeline, expectations and process of AQRs already undertaken, in progress and planned. At the same time, these recommendations will provide non-SSM Member States which have not yet engaged in an AQR with a framework for taking them forward. Where banks operate outside the SSM or otherwise across borders in the EU, colleges of supervisors will be involved in this exercise. They will facilitate information exchange, and where applicable and upon request of the consolidating supervisor, contribute to the analysis undertaken for cross-border banks. The results will be communicated to the college and to the EBA. In this context, measures to improve risk coverage and provisioning, and other measures considered necessary and appropriate address any deficiencies, should be discussed. When reviewing the results, competent authorities should discuss and challenge the outcomes and consider subsequent actions. As a result, competent authorities should be able to challenge the data received from banks and, if appropriate, recommend measures e.g. to adjust loan losses, provisioning or any other measures considered appropriate by the competent authorities to address any deficiencies. The EBA, while respecting the communication needs of the competent authorities, will make use of the information provided by them to draft a report summarising the main outcomes
   of the various AQRs and providing some information in a consistent way across jurisdictions about what steps have been taken and the materiality of the outcomes.