31 January 2014

EBA announces key features of the 2014 EU-wide stress test

This exercise aims at ensuring consistency and comparability of the outcomes across all banks based on a common methodology, scenarios and accompanied by a consistent disclosure exercise.

The 2014 EU-wide stress test is designed to provide supervisors, market participants and institutions with consistent data to contrast and compare EU-banks' resilience under adverse market conditions. To this end, the EBA will provide competent authorities (CAs) with a consistent and comparable methodology, which will allow them to undertake a rigorous assessment of banks' resilience under stress.

The exercise has been designed also in coordination with the ECB, which in preparation of the Single Supervisory Mechanism (SSM) is conducting a comprehensive assessment comprising of a risk assessment, asset quality review and a stress test.

The EU-wide stress test will be conducted on a sample of 124 EU banks which cover at least 50 per cent of each national banking sector, and will be run at the highest level of consolidation.  Given its objectives, the 2014 EU-wide stress test will be conducted under the assumption of a static balance sheet which implies no new growth and constant business mix and model throughout the time horizon of the exercise.

Banks will be required to stress a common set of risks including: credit risk, market risk, sovereign risk, securitisation and cost of funding. Both trading and banking book assets will be subject to stress, including off-balance sheet exposures. CAs may include additional risks and country-specific sensitivities beyond this common set but the published results should allow understanding the impact of the common set of risks in isolation.

In terms of capital thresholds, 8 per cent Common Equity Tier 1 (CET1) will be the capital hurdle rate set for the baseline scenario and 5.5 per cent CET1 for the adverse scenario. The relevant CA may set higher hurdle rates and formally commit to take specific actions on the basis of those higher requirements.

Press release

Main features of the 2014 EU-wide stress test

List of sample banks

FAQs

Association of German Banks on publication of the stress test specifications

General Manager Michael Kemmer said: “The specifications for the stress test have been eagerly awaited by the banks. Now they can start to prepare for the test. We welcome the inclusion of government bonds. This will increase the stress test’s credibility. We also take a positive view of the apparent plan to consult the industry on the exact stress test methodology. Nevertheless, the criteria unveiled today leave considerable room for leeway on some important issues. This goes, for instance, for the valuation of government bonds, to which stressed market parameters are to be applied directly. It would be desirable to have greater clarity about the intended procedure.

"It is problematic, in our view, that different countries may have different capital hurdle rates and exemptions from the static balance sheet assumption and may treat risk categories in different ways. This could easily cause problems when trying to make cross-border comparisons and when communicating the results. Nor is it sufficiently clear whether the EBA’s EU-wide specifications for its stress test will be identical with those for the ECB’s stress test for eurozone banks. It is essential to ensure that the specifications are the same and that there are no differences even in matters of detail. Here too, we believe the necessary clarity is missing. It is therefore important that future communication about the stress test is better coordinated by the EBA and ECB. Disputes between European institutions should not be conducted at the expense of the banks.”

Press release

Fitch: EU Bank Stress Test Raises Hurdle, But Lacks Key Details

The EBA has raised the capital hurdle for its European-wide bank stress test this year, but the robustness of the exercise will depend on final methodology and scenarios, and how regulators apply certain discretions, Fitch Ratings says.

Fitch expects additional capital needs to emerge from the stress test, but these are impossible to quantify at this stage. Banks across northern Europe should be able to address capital needs from internal sources, while banks with shortfalls in the more stressed environments of southern Europe may need to turn to external markets and more meaningful deleveraging through asset sales.

The outcome of the test will depend on methodology and scenarios scheduled to be published in April. It will also depend on how the regulators - the ECB for eurozone banks and national supervisors for others - apply certain discretions. For example, the scenarios will include haircuts for sovereign bonds, but regulators can currently filter out unrealised losses for available-for-sale sovereign debt from banks' capital calculations. There is uncertainty about how the filter will be applied in the test and how risk weights for held-to-maturity sovereign bonds may be altered. Transparency will probably be limited until the treatment is disclosed in October, when the stress test results are published.

Regulators may also assess the stress test using other thresholds, including a fully loaded Basel III common equity Tier 1 (CET1) or leverage ratio. Fitch believes the ECB could be stricter than some national supervisors it is taking over from in applying some discretions and determining bank-specific supervisory measures.

Full press release, 5.2.14

© EBA