FAQs on the revised asset quality review manual

The ECB carries out financial health checks on the banks it supervises. These include asset quality reviews (AQRs). These responses to frequently asked questions (FAQs) provide further details of the methodology applied in such exercises.

What is the AQR manual?

The AQR manual contains the methodology we use to conduct AQRs on the banks we supervise as part of European banking supervision. Supervisors carry out AQRs to review banks’ asset valuations from a prudential perspective, increase the transparency of their exposures and assess the adequacy of their capital levels.

Who uses the AQR manual?

As the AQR manual is publicly available and outlines our supervisory expectations, it is used as a tool by all parties involved in banking supervision and in conducting AQRs. As a supervisor, the ECB leads the AQR exercises and is responsible for central quality assurance. Supervisors from the national competent authorities conduct quality assurance at the national level. External consultants and auditors are involved in carrying out the exercises.

What has changed in the updated AQR manual compared with the previous version?

The main changes in the current manual since the 2018 version relate to the credit file review, collateral valuation and collective provisioning chapters. The aim of the changes is to reduce the complexity of the AQR exercise and to incorporate the latest regulatory expectations.

In particular, for the credit file review, the samples will be more risk-based and will focus on the parts of portfolios with more historical reclassifications. Additionally, the cash-flow multiples have been recalculated, allowing additional segmentation by sectors. Furthermore, collateral haircuts used for AQR purposes will incorporate the recovery strategy of each individual bank. Finally, ECB supervisory coverage expectations for non-performing exposures have been incorporated as a floor in the credit file review. With regard to collective provisioning, the loss-given-loss for residential real estate portfolios will be estimated based on historical recoveries. It will be estimated using not only exposures that have incurred a write-off but also open defaults which should have been fully provisioned in accordance with the supervisory expectations in the addendum to the ECB guidance to banks on non-performing loans.

Do updates to the manual have any impact on previous AQR exercises?

No. The updated methodology applies for all AQRs from 2023 onwards and has no effect on previous exercises.

Do you plan further updates in the future?

The manual may be updated in the future should there be, for example, a change in any relevant regulation or should it become necessary to address new risks.