EBA's Enria: stress tests complicated by multi-speed CRR

State-specific timelines and other options are making it difficult to compare test data, EBA chairman tells UK parliamentary committee

Andrea Enria, EBA

The multi-speed implementation of prudential rules in Europe under the Capital Requirements Regulation (CRR) is causing inconsistencies between member states, with each moving at a different pace. That is causing problems for the EU's soon-to-be-published stress tests, according to Andrea Enria, chairman of the European Banking Authority (EBA), which administers the tests.

"In the implementation of the CRR there is a calendar for the phasing in of the new requirements with a lot of discretion given to national authorities on how to phase in the new requirements and this is leading - for instance on the stress tests we will publish at the end of this month - to a lot of challenges in terms of making sure you publish data that are truly comparable, because the national implementation of the same rules is different," said Enria, giving testimony today to the sub-committee on EU economic and financial affairs run by the UK's House of Lords, the second chamber of parliament.

The CRR was passed into law in June 2013 and became effective at the start of this year, with full implementation required by member states from January 2019. European regulation differs from European directives because the former has binding power across the EU - although the CRR still grants member states a number of options - whereas directives must be passed into member state law before becoming effective.

As well as disparities due to the staggered implementation schedule across countries, other options granted to member states could also lead to differences emerging, warned Enria. One option, for example, is to continue filtering unrealised losses on available-for-sale bond portfolios from common equity numbers - the UK removed this filter, while Germany and Ireland are among states that left it in place.

"In the past, it worked in this way; you had international standards, then directives at the European level and then the directives left room for national authorities to deviate from the international standards in the minimum way to adjust for specificities in their market. Now we have the single rulebook, each country brings its national issues into the European regulation, which means you sum up all the deviations from the international standards in the European rules and the risk is that the European rules deviate from international standards."

This is leading - for instance on the stress tests we will publish at the end of this month - to a lot of challenges in terms of making sure you publish data that are truly comparable

This year's stress test has already prompted some banks to sell off riskier assets and try to shrink problem loan portfolios - but Enria said this was no bad thing.

"You see a number of risks that are shifting to other intermediaries. That process, to be honest, in my view is not to be seen on the negative... The cleaning-up of bank balance sheets, for example non-performing loans that are moved to specialist funds - I think it is good to complete this process," said Enria.

He also argued the EBA should be brought into the rulemaking process at an earlier stage. Rather than being handed a directive from which they are to produce technical standards, Enria said he would like to see the authority's expertise taken advantage of earlier. Similarly, he added discussions are taking place with the European Commission to have the commission carry out an earlier assessment of the legal basis for the EBA's rule writing - the most common reason for the rejection of EBA draft standards.

"What we are discussing with the commission is having earlier involvement of their legal services so we don't come at a very late stage to discuss these issues," he said.