Update October 2016
On 29 July 2016 the EBA published the results of the 2016 EU-wide stress test of 51 banks from 15 EU and EEA countries covering around 70% of banking assets in each jurisdiction and across the EU. According to the EBA: „The EU banking sector has significant shored up its capital base in recent years leading to a starting point capital position for the stress test sample of 13.2 % CET1 ratio at the end 2015. This is 200 bps higher than the sample in 2014 and 400 bps higher than in 2011. The hypothetical scenario leads to a stressed impact of 380 bps on the CET1 capital ratio, bringing it across the sample to 9.4% at the end of 2018.“
Previous article from 12-2-2016
On 18 December 2015 the European Banking Authority (EBA) launched a public consultation on its draft Guidelines on stress testing and supervisory stress testing (EBA/CP/2015/28).
The EBA issues these draft guidelines partly to update and replace the existing CEBS guidelines on institutions’ stress testing (GL32) and partly on the basis of Article 100(2) of Directive 2013/36/EU (the so-called CRD) to cover supervisory stress testing. The supervisory stress testing is an obligation of competent authorities and is independent from the official sector EU-wide stress testing.
The guidelines cover:
The guidelines aim at achieving convergence of practices of both institutions and competent authorities.
Stress testing is one of the tools how institutions can comply with the requirement to take into account the forward-looking view in their risk management, strategic planning and liquidity planning as part of the internal capital adequacy assessment process (ICAAP) and internal liquidity adequacy assessment process (ILAAP). The rules for institutions focus among other things on the interaction between the outputs of stress tests and management actions and the application for recovery and resolution purposes, and the stress tests to assess the viability of the institution’s capital plan in adverse circumstances in the context of ICAAP and ILAAP.
The guidelines also provide clear taxonomy of stress tests and some definitions. The areas that are newly defined and incorporated include e.g. reverse stress testing or new individual risk categories such as conduct risk or FX lending risk. (The reverse stress test starts with a pre-defined outcome and then explores the scenarios and circumstances that might cause it to occur. The conduct risk arises due to risk of losses from inappropriate supply of financial services and associated litigation costs including cases of wilful or negligent misconduct.) Moreover, business models, data aggregation and other concepts were updated to reflect best industry and supervisory practices.
The guidelines are published for public consultation until 18 March 2016.
The information about EU-wide stress tests including methodologies and scenarios may be found here. The next EU-wide stress test is planned for 2016 and EBA already published draft methodology for discussion.