...this year’s stress test shows that the steps that both banks and supervisors have taken over the years to strengthen the resilience of the EU banking sector are now paying off.
Following the publication of the EU-wide stress test results by the European Banking Authority today, the Association for Financial Markets in Europe (AFME) issued a statement on behalf of its members that participated in the exercise.
Caroline Liesegang, Head of Prudential Regulation at AFME, said: “AFME welcomes the results of this year’s EBA stress tests. Despite an extreme ‘adverse scenario’ including high and persistent inflation and a severe decline in EU GDP, plummeting by 6% over the 3-year period, this year’s stress test shows that the steps that both banks and supervisors have taken over the years to strengthen the resilience of the EU banking sector are now paying off.
“The results reflect a better starting point for banks, with higher levels of capital, improved asset quality and profitability driving the change compared to the previous stress test. We also note that EU subsidiaries of international banks, included in the EU-wide stress test for the first time this year, have finished the exercise showing a robust solvency position.
“Notwithstanding the overall positive outcome, we urge the EBA to take a fresh look at the stress test methodology and remove or at least recalibrate some of the existing constraints that often override banks’ bottom-up projections. The EBA stress test follows a constrained bottom-up approach, involving banks in identifying risks using their own models to encourage better risk management practices. A successful stress test should find a balance between supervisory standardisation and accommodating individual bank characteristics.
“Finally, the new banking package (CRR3/CRD6) - the entry into force of which is expected by January 2025 - will warrant a comprehensive review of the EU stress test framework. The structural changes to the calibration of the Pillar 1 framework combined with other overlaps across the Pillar 1 and Pillar 2 capital risk coverage warrant a critical assessment of the methodology.
“We look forward to working with the EBA in further evolving the methodology for the 2025 stress test.”...
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