EBA launched the 2021 EU-wide stress test and released the associated macroeconomic scenarios. The documents published by EBA include a methodological note, templates, template guidance, and frequently asked questions on the stress test exercise. ESRB and ECB have developed the adverse macroeconomic scenario, in close cooperation with EBA, the competent authorities, and the national central banks. The 2021 EU-wide stress test is expected to provide valuable inputs on the resilience of the banking sector in EU, considering that the 2020 stress test exercise was postponed due to the pandemic. EBA expects to publish results of the exercise by July 31, 2021.
The baseline scenario for EU countries is based on projections by the national central banks while the adverse scenario assumes materialization of the ESRB-identified key financial stability risks in the banking sector. The adverse scenario is based on the narrative of a prolonged COVID-19 scenario in a “lower for longer” interest rate environment, in which negative confidence shocks would prolong the economic contraction. The outcome might provide valuable input to make informed decisions on possible exit strategies from the flexibility measures granted to banks due to the COVID-19 crisis, or on the need for additional measures, should the economic conditions deteriorate further. The 2021 stress test methodology of EBA was published in November 2020 and is to be applied to these scenarios.
The EU-wide stress test will be conducted on a sample of 50 EU banks—38 from countries under the jurisdiction of the Single Supervisory Mechanism (SSM)—covering roughly 70% of the banking sector assets in EU and Norway, as expressed in terms of the consolidated assets as of the end of 2019. In parallel, ECB plans to conduct its own stress test for 53 banks that it directly supervises and that are not included in the EBA-led stress test sample. This exercise will be consistent with the methodology of EBA and apply the same scenarios, while including proportionality elements as suggested by the overall smaller size and lower complexity of these banks.
The EBA stress tests are conducted in a bottom-up fashion, using consistent methodologies, scenarios, and key assumptions developed in cooperation with the ESRB, ECB, and EC. The stress test allows supervisors to assess if banks’ capital buffers, which have been accumulated in recent years, are sufficient to cover losses and support the economy in stressed times. Moreover, the exercise fosters market discipline through the publication of consistent and granular data at a bank-by-bank level, which is crucial particularly at times of increased uncertainty in the markets. The results of the exercise are an input to the Supervisory Review and Evaluation Process (SREP).
- EBA Press Release and Related Documents
- ECB Press Release
- ESRB Note on Macro-Financial Scenario (PDF)
- Overview of Stress Test Exercise
Keywords: Europe, EU, Banking, COVID-19, Stress Testing, 2021 Stress Test, SREP, SSM, Basel, ESRB, ECB, EBA
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