The European Banking Authority (EBA) today agreed to adopt a benchmark of Core Tier 1 (CT1) against which to assess banks in the 2011 EU-wide stress test. The CT1 benchmark will be set at 5% of risk weighted assets.
This CT1 definition will be used solely for the purpose of the EU-wide stress test and refers to specific criteria which will be applied consistently across all countries participating in the exercise.
This definition is based on existing EU legislation in the Capital Requirements Directive (CRD). It takes the existing EU definition of Tier 1 net of deductions of participations in financial institutions and it strips out hybrid instruments including existing preference shares. It recognises existing government support measures, which will be identified separately in the results.
To ensure a fully harmonised computation by all the banks involved in the exercise, the EBA has mapped the different capital elements of CT1 to the current COREP reporting framework.
Only commercial instruments of the highest quality are included in this CT1 definition – ordinary shares or similar instruments in line with the principles detailed in CEBS/EBA guidelines on core capital.
This means, in particular, that the commercial instruments included in CT1 have to be simple, issued directly by the institution itself and able, both immediately and without any doubt, to meet the criteria of permanence, flexibility of payments and loss absorption in going concern situations. The inclusion of government support measures in this definition reflects the expectation of supervisors that those instruments will be fully available to absorb losses and shelter banks in case of difficulties.
To ensure full transparency, the stress test will include full disclosure of all capital elements included in CT1 and their evolution since December 2010, under both the baseline and the adverse scenarios.
The 5% CT1 benchmark is not a legal minimum requirement. However, the EBA expects any bank failing to meet the benchmark, or showing specific weaknesses in the stress test, to agree with the relevant supervisory authority the appropriate remedial measures and execute them in due time. The EBA expects these measures to be disclosed separately.
This year, the sample contains 90 banks, including a number of banks which were not included last year. No banks have dropped out of the 2010 sample except in cases where they no longer exist in their present form. The current sample continues to represent more than 65% of banking assets in the EU and more than half of the banking assets in all individual EU countries.