Recital 22

(22)To preserve market discipline, protect public funds and avoid distortions of competition, precautionary measures should remain the exception and only be applied to address situations of serious disturbance in the market and to preserve financial stability, in particular in the event of a systemic crisis. Moreover, precautionary measures should not be used to address losses incurred or likely to be incurred. The most reliable instrument to quantify losses incurred or likely to be incurred is an asset quality review by the ECB, the European Supervisory Authority (European Banking Authority) (EBA) established by Regulation (EU) No 1093/2010 of the European Parliament and of the Council ¹⁴ or by national competent authorities. The ECB and national competent authorities should use such a review or, where appropriate, on-site inspections, to quantify losses incurred or likely to be incurred where such a review or inspections can be carried out within a reasonable timeframe. Where that is not possible, the ECB and national competent authorities should quantify losses incurred or likely to be incurred in the most reliable way possible under the prevailing circumstances, where appropriate on the basis of the entity’s balance sheet, provided that the balance sheet complies with the applicable accounting rules and standards, as confirmed by an independent external auditor. The consideration that an entity is solvent, for the purposes of support measures in the form of precautionary recapitalisation and of State guarantees of newly issued liabilities, should be based on a forward-looking assessment of whether the entity can comply with the own funds requirements laid down in Regulation (EU) No 575/2013 or Regulation (EU) 2019/2033 of the European Parliament and of the Council ¹⁵ , and the additional own funds requirement laid down in Directive 2013/36/EU or Directive (EU) 2019/2034 of the European Parliament and of the Council ¹⁶ .