Asset quality review – Phase 2 Manual, 2023

The ECB has published its Asset Quality Review Phase 2 Manual, 2023, which provides guidance for the AQR exercise conducted by the ECB and NCAs in 2023, along with a corresponding FAQs on the revised asset quality review manual.
It covers processes such as the review of PP&A, loan tape creation and data integrity validation, credit file review, and collective provisioning analysis. The loan tape creation and data integrity validation section explains the analysis required for DIV and the creation of loan tapes by banks. Automated checks are performed to ensure accuracy and transparency in banks‘ balance sheets.
The credit file review section outlines the process of reviewing credit files to identify misstatements and assess asset quality. Statistical tests are used to identify instances of misstatement over or underestimation.
The collective provisioning analysis section provides guidance on analyzing collective provisions and fair value exposures. This analysis is conducted using PowerPoint presentations and templates, with results used to identify findings and recommend necessary actions.
The PP&A review section involves assessing processes, policies, and accounting through a questionnaire. Inconsistencies with accounting principles are identified, and quantitative adjustments are made for the AQR CET1% result. Remedial actions are specified for policy and process issues.
The manual also includes information on technical assistance, Phase 2 methodology, timelines, snapshots, definitions, and provisions. The ECB provides support through a QA and technical assistance team, and indicative timelines assist in the planning process.
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As mentioned above, the ECB also published a corresponding FAQ, thereby providing answers to frequently asked questions about the revised AQR manual used by the ECB to conduct financial health checks on the banks it supervises. The FAQ expains that the AQR manual contains the methodology used to review banks‘ asset valuations from a prudential perspective, increase the transparency of their exposures, and assess the adequacy of their capital levels.
The FAQ points out that the main changes in the current manual since the 2018 version relate to the credit file review, collateral valuation, and collective provisioning chapters. The FAQ informs agbout the aim of the changes being to reduce the complexity of the AQR exercise and to incorporate the latest regulatory expectations. The updated methodology applies for all AQRs from 2023 onwards and has no effect on previous exercises.