Press release 6 November 2013 - Methodology
The Bank of Slovenia, in conjunction with the Ministry of Finance, launched in late summer a comprehensive exercise of Asset Quality Review (AQR) and Stress-Tests, which would constitute an important element in the repair and restructuring of the banking sector.
This exercise also responds to the Council Recommendation on the National Reform Programme 2013 for Slovenia and the Council opinion of the Stability Programme of Slovenia, 2012-2016 requesting the execution of an independent system-wide AQR and bottom-up stress tests.
The exercise is composed of three important building blocks: a comprehensive AQR, a bottom-up stress test and a top-down challenge to the results of the bottom-up stress tests by independent consultants.
There are ten banks and banking groups involved in the exercise, which together account for approximately 70% of the Slovenian banking system.
More specifically, the sample of the system-wide exercise includes the three systemically important banks and banking groups (NLB, NKBM and Abanka), and Gorenjska banka, Banka Celje, UniCredit Banka Slovenije, Hypo Alpe Adria Bank, Raiffeisen bank, Probanka and Factor banka. Regarding the latter two banks, the orderly winding-down processes initiated at the beginning of September has reduced the need for a comprehensive parallel screening and therefore will only be partly convered by the system-wide exercise.
The aim of the bottom-up stress tests is to assess the risk-based capital requirements of the Slovenian banking system and individual banks under a baseline scenario and an adverse scenario. The reason for using such an adverse scenario is to assess the robustness of the Slovenian banking system in a situation of the adverse hypothetical but plausible stress. While the realisation of the baseline scenario is highly likely, the adverse scenario assumes a further deterioration in the macroeconomic situation in Slovenia.
The Bank of Slovenia appointed and hired an independent consulting firm for the stress tests for the AQR, and several independent appraisers for real estate valuations. The AQR and the stress tests are therefore being conducted by established firms of international repute with the requisite experience and skills in this area. They are conducting the exercise on the basis of tried and tested methods and international standards, also drawing on the techniques used in comparable exercises conducted to date within the EU.
The scope and working method for individual parts of the exercise were coordinated and agreed between Bank of Slovenia, the consultants, the AQR providers, the Real Estate coordinator and the top-down challenger for the bottom-up stress tests, the AQR, the real estate valuation and the top-down challenge.
The banks’ consolidated figures for the end of 2012 form the basis for the stress test calculations. Unlike previous tests, these stress tests cover a time horizon of three years (2013 to 2015), which consequently provides for more accurate and more credible analysis refelcting a protracted economic recession and its impact on banks’ asset quality and potential losses and eventually capital requirements.
The stress tests are based on current capital regulations without anticipating the CRD IV / CRR requirements. The sole exception is the treatment of deferred tax assets (DTAs), for which a phase-in approach has been integrated in accordance with the CRD IV / CRR.
The bottom-up stress tests will yield a calculation of the surplus/deficit in available capital relative to the capital requirements according to the following benchmarks:. 9% of Core Tier 1 capital ratio (as defined by the EBA) under the baseline scenario and 6% of Core Tier 1 capital ratio (as defined by the EBA) under the adverse scenario.
The bottom-up stress tests will include three main elements of assessment as follows:
- the bank’s loss absorption capacity, which includes the stock of impairments and provisions for the observed portfolio as at the end of 2012, the ability to generate earnings before impairments and provisioning, and the potential capital surplus over the minimum Core Tier 1 requirements of 9% and 6%, ignoring all the mitigating measures planned by management to cover a potential capital deficit after the cut off date;
- the bank’s loss forecasting from performing and non-performing claims and from restructured claims;
- the bank’s solvency position under the baseline and adverse scenarios, which is in line with the surplus/deficit in the bank’s loss absorption capacity.
The exercise has been produced in accordance with methodologies, working methods, assumptions and processes that have been specified by a steering committee comprising the Bank of Slovenia, the Ministry of Finance and observers from the European Commission, the ECB and the EBA is coordinating and overseeing the stress tests and the AQR. The steering committee’s aim is to ensure that the entire exercise is conducted with the highest possible quality, based on the consistent and uniform application of the methodology across all the banks and banking groups involved. The steering committee is responsible for approving all the key elements of the exercise and the methodological approaches, for providing instructions for individual phases, and for reviewing the results of the stress tests in the final phase.
The AQR and stress tests are proceeding according to plan, and results are expected by the end of the year. Together with the results of the exercise the Bank of Slovenia will also publish details of the methodology employed, but is unable to disclose any further methodological details until the final results are published.