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EBA Methodological Guide Summary

Core Content Overview

This document provides a comprehensive methodological guide for the compilation and interpretation of Risk Indicators (RIs) and Detailed Risk Analysis Tools (DRATs) by the European Banking Authority (EBA). It outlines the EBA's approach to monitoring and assessing risks in the EU banking sector, focusing on eight main types of risk: liquidity, funding, asset quality, profitability, concentration, solvency, operational, and market risk, as well as a dedicated category for SME risk indicators. The guide is intended to support the EBA’s micro-prudential analysis, enhance transparency, and enable consistent comparisons between institutions and EU aggregates.

Main Risk Indicator Categories

1.1 Liquidity Risk

• Definition: The risk that a firm may not be able to fund its assets or meet its financial obligations without incurring significant costs or losses.
• Key Indicators:
  • LIQ 1: Core funding ratio (% of total liabilities) – 'Turner ratio'
  • LIQ 2: Short-term wholesale funding ratio (% of items providing stable funding)
  • LIQ 3: Liquid assets to short-term liabilities
  • LIQ 4: Liquid assets ratio (% of total items requiring stable funding)
  • LIQ 5: Withdrawable funding (% of total liabilities)
  • LIQ 6: Term funding (% of total liabilities)
  • LIQ 7: Share of central bank and publicly guaranteed exposures within liquid assets
  • LIQ 8: Repos to total liabilities
  • LIQ 9: Funding via derivatives (% of total items providing stable funding)
  • LIQ 10: Firm-specific currency concentration
  • LIQ 11: Cash and trading assets to total assets
  • LIQ 12: Cash, trading, and available-for-sale (AFS) assets to total assets
  • LIQ 13: Financial assets held for trading to total assets
  • LIQ 14: Financial liabilities held for trading to total liabilities and equity
  • LIQ 15: Extremely high liquid assets to total liquid assets
  • LIQ 16: Retail outflows to retail inflows
• DRATs:
  • DRAT 27: Liquid assets to items requiring stable funding ratio by currency

1.2 Funding Risk

• Definition: The risk of not having access to sufficient funds to meet obligations as they fall due.
• Key Indicators:
  • FND 1: Asset encumbrance to total assets
  • FND 2: Encumbrance of central bank eligible assets
  • FND 3: Encumbrance of government bonds
  • FND 4: Encumbrance of collateral
  • FND 5: Over collateralisation
  • FND 6: Contingent encumbrance
  • FND 7: Encumbered assets at central bank
  • FND 8: % of total deposits covered by a deposit guarantee scheme to total liabilities
  • FND 9: Debt securities to total liabilities
  • FND 10: Deposits from credit institutions to total liabilities
  • FND 11: Loans and advances (excl. trading book) to total assets
  • FND 12: Debt-to-equity ratio
  • FND 13: Off-balance-sheet items to total assets
  • FND 14: Annual growth rate of total assets
  • FND 15: Annual growth rate of total loans
  • FND 16: Annual growth rate of total customer deposits
  • FND 17: Loan-to-deposit ratio
  • FND 18: Customer deposits to total liabilities
  • FND 32: Loan-to-deposit ratio for households and non-financial corporations
  • FND 34: Asset encumbrance ratio
• DRATs:
  • DRAT 28: Term funding per currency

1.3 Asset Quality Risk

• Definition: The risk that a bank's assets may deteriorate in value, potentially leading to losses.
• Key Indicators:
  • AQT_1: Non-performing loans and debt securities net of impairments to prudential own funds
  • AQT_2: Non-performing loans and debt securities net of impairments to Tier one capital
  • AQT_3.1: Non-performing loans and debt securities to total gross debt securities and loans and advances (NPE)
  • AQT_3.2: Level of non-performing loans and advances
  • AQT_3.3: Non-performing debt securities to total gross debt securities (NPDS)
  • AQT_3.3.1 to AQT_3.3.5: Non-performing debt securities by counterparty sector
  • AQT_3.2.1 to AQT_3.2.5: Non-performing loans and advances by counterparty sector
  • AQT_24.1 and AQT_24.2: Ratio of forborne assets by country – Debt securities and Loans and Advances
  • AQT_25: Past due (>90 days) but not impaired loans to total loans and advances
  • AQT_26: Impaired and past due loans to total loans subject to impairment
  • AQT_27 to AQT_33: Net allowances, coverage ratios, and impairment ratios for various asset types
• Purpose: To monitor the quality of assets and identify potential losses, especially from non-performing exposures.

1.4 Profitability Risk

• Definition: The risk that a bank's earnings or growth potential may be negatively impacted due to liquidity constraints or other factors.
• Key Indicators:
  • PFT 1 to PFT 10: Various profitability ratios and growth indicators
• DRATs:
  • DRATs are not detailed in this section, but the guide notes that they are included in the full document.

1.5 Concentration Risk

• Definition: The risk arising from excessive concentration in certain sectors, geographies, or currencies.
• Key Indicators:
  • CON 1 to CON 10: Concentration ratios across different dimensions
• DRATs:
  • DRATs are not detailed in this section, but the guide notes that they are included in the full document.

1.6 Solvency Risk

• Definition: The risk that a bank may not have enough capital to absorb potential losses.
• Key Indicators:
  • SVC 1 to SVC 10: Solvency-related ratios, including capital adequacy measures
• DRATs:
  • DRATs are not detailed in this section, but the guide notes that they are included in the full document.

1.7 Operational Risk

• Definition: The risk of loss resulting from inadequate or failed internal processes, people, or systems, or from external events.
• Key Indicators:
  • OPR 1 to OPR 10: Operational risk indicators based on internal and external data
• DRATs:
  • DRATs are not detailed in this section, but the guide notes that they are included in the full document.

1.8 Market Risk

• Definition: The risk of losses due to changes in market prices or conditions.
• Key Indicators:
  • MKR 1 to MKR 10: Market risk indicators related to interest rates, exchange rates, and equity prices
• DRATs:
  • DRATs are not detailed in this section, but the guide notes that they are included in the full document.

1.9 SME Risk Indicators

• Definition: Indicators specific to monitoring the risks associated with small and medium-sized enterprises (SMEs).
• Key Indicators:
  • SME 1 to SME 10: Indicators focused on SME-related exposures and performance
• DRATs:
  • DRATs are not detailed in this section, but the guide notes that they are included in the full document.

Methodological Issues and DRATs

Part II: Methodological Issues

• Scope of Data:

  • The EBA relies on data from the COREP and FINREP reporting frameworks.
  • Data may be collected directly from institutions or mapped from national formats.
  • Data quality assurance procedures are essential for accurate interpretation.

• Negative Values in Ratios:

  • Special attention must be given to handling negative values in numerators and denominators.
  • The guide provides methods to interpret and manage such values, including allocation techniques.

• Statistical Measures:

  • Averages, percentiles, and standard deviations are used to provide insights into risk distribution and trends.
  • These measures help in identifying outliers and assessing the overall risk profile.

• Currency Reporting in ITS Liquidity Templates:

  • The EBA requires reporting by currency to capture liquidity risk in different currencies.
  • This helps in identifying potential liquidity shortfalls in specific jurisdictions.

• Flow Data in Risk Indicators:

  • Flow data is used to assess the dynamic changes in risk over time.
  • It provides a more comprehensive view of the institution's risk exposure.

• 'Follow-the-Money' Approach:

  • This approach traces the flow of funds through the financial system.
  • It helps in identifying the sources and uses of liquidity and the potential for contagion.

• Peer Group Analysis:

  • The EBA encourages the use of peer group analysis to compare institutions and identify risk trends.
  • This can highlight areas where certain banks may be more exposed than others.

Annexes

• Annex I: Lists all risk indicators, including their ID, name, formula, computation frequency, range, and the phenomenon they measure.
• Annex II: Provides detailed calculations and graphical representations (matrices) of the DRATs.

Purpose and Structure

• The guide is designed to support the EBA's risk indicators and DRATs, ensuring consistent interpretation and application across institutions and jurisdictions.
• It enhances transparency in the computation of risk indicators, which are used in EBA publications such as the risk assessment report and risk dashboard.
• It is not mandatory but serves as a reference for competent authorities to compute and compare risk indicators using the same methodology.
• The guide is a living document and may evolve to reflect changes in EU supervisory reporting and user needs.

Conclusion

This guide provides a structured and detailed approach to compiling and interpreting risk indicators and DRATs for the EU banking sector. It ensures consistency, transparency, and comparability in risk assessment, supporting both internal EBA analysis and external understanding of banking risks.