Estonian banks have a strong capital base
All Estonian banks that participated in the Comprehensive Assessment (CA) organised by the European Central Bank were very successful in this exercise. The outcome of the Asset Quality Review (AQR) of the banks that were subjected to the ECB’s Comprehensive Assessment influenced the capital adequacy of important banks in Estonia - Swedbank and SEB Pank - only by less than one percentage point.
Strength test that measures the resilience of banks to potential crisis situation, i.e. stress test, demonstrated that tested crisis scenarios had no adverse effects on the capital adequacy of important banks in Estonia. Potential additional credit losses could be covered by interest income or existing capital buffers.
The performed conservative assessment had a more significant effect on the small bank DNB Pank that participated in the assessment due to its smaller size and credit portfolio concentration. Nevertheless, the small bank managed to meet the required capital levels by a considerable margin.
„The capital base of the banks is strong and the capacity to absorb potential materialisation of risks in stress situation is high. It is reflected by the fact that the capital adequacy ratio of significant banks did not fall as a result of the Comprehensive Assessment,” stated Mr. Andres Kurgpõld, member of the Management Board of the Financial Supervision Authority.
Comprehensive Assessment consisted of the Asset Quality Assessment and the subsequent stress test. Stress test methodology was developed and the stress test performed in cooperation with the European Banking Authority (EBA).
Detailed results on Swedbank, SEB Pank and DNB Pank that participated in the Comprehensive Assessment are available on the ECB website.
In the course of measuring the asset quality of banks, the European Central Bank assessed the actual value of bank’s assets and the sufficiency of collateral as at 31 December 2013. This exercise encompassed the assets of 130 euro area banks. It was a risk-based assessment, performed in accordance with the conservative assessment methodology developed by the European Central Bank and not pursuant to accounting rules.
As the assets of banks were not subjected to Comprehensive Assessment prior to previous stress tests performed by the European Banking Authority, this exercise provided a unique evaluation of banks. Previous stress tests were performed in respect of assets that had not been previously risk adjusted.
Unlike the Comprehensive Assessment of the assets of euro area banks, the stress test encompassed also banking groups from non-euro area Member States (22 EU Member States in total) and this strength test was performed in respect of 123 banking groups.
European Central Bank together with financial supervisors and auditors performed the Comprehensive Assessment of banks in order to provide accurate information on the actual status of euro area banking sector to the new common supervisory body – the Single Supervisory Mechanism (SSM) – set up at the ECB. The ECB will assume its full supervisory tasks on 4 November. Comprehensive Assessment of banks was aimed at providing a European-wide comparative overview of balance-sheet risks of banks and risk coverage by capital. The list of banks that participated in the Comprehensive Assessment is available here.
European common bank supervision commences its tasks on 4 November when the ECB assumes the direct supervision over 130 banks that are considered important in the euro area. Assets of important banks amount to approximately 85% of total assets of euro area banking sector. Two banks operating in Estonia – Swedbank and SEB Pank – will be subjected to the Single Supervisory Mechanism.
Under this common supervisory regime, the ECB will be responsible for ensuring that banks meet the capital and liquidity requirements, as well as for issuing and revoking of licenses and authorising the acquisitions of qualifying holdings in banks.