It is important to note that the EBA results should not be interpreted as indicative of the UK results, nor can the results of the UK stress test be inferred from the EBA results. The BoE will publish the results of the UK variant stress test on 16th December.
Although the EBA stress test and UK variant stress test are complementary, there are a number of significant methodological differences between the two.
These include:
-
Balance sheet assumptions: the EBA test uses a static balance sheet. The Bank of England stress test uses a dynamic balance sheet definition, so that the size and composition of banks’ balance sheets are allowed to vary throughout the scenario. Simple read-across therefore cannot be made
-
Income and expense: the EBA applies simple income-caps and expense-floors. The UK exercise does not apply these caps and floors so income could increase and expenses could fall
-
UK house-price fall in both stresses: it is not possible to infer the impact of the housing stress for the UK test from the EBA results. This is because additional house price falls (as seen in the UK test) do not necessarily have a linear effect on impairments
In April 2014, the Bank of England set out a definition of capital for UK firms to use for the purpose of the 2014 EU-wide stress testing exercise, in order to improve comparability and consistency across EU firms. This definition followed the Capital Requirements Regulations (CRR) minimum transition path for certain deductions from CET1 capital.
The EBA has now introduced additional disclosures to help improve comparability and consistency, particularly the explicit disclosure of fully loaded CET1 ratios for all banks. The Bank of England welcomes this important additional comparability.
As a result, for the purpose of the final published 2014 EU-wide stress testing results, the Bank of England has asked UK banks to use a definition of capital that follows the UK implementation of CRR. The only exception is that, for the purpose of the 2014 EU-wide stress-testing exercise, firms should follow the EBA’s common approach for the application of prudential filters for sovereign assets in the Available For Sale (AFS) portfolio.
This definition is consistent with the definition of capital set out by the EBA in their report on the exercise, as published October 27.
Full news release on the Bank of England's site
EU-wide stress test results
© Bank of England
Key
Hover over the blue highlighted
text to view the acronym meaning
Hover
over these icons for more information
Comments:
No Comments for this Article