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
Previous ArticleBoE Conducts Poll on Climate Issues, Outlines Initiatives for 2021
BIS published a paper that provides an overview on the use of big data and machine learning in the central bank community.
APRA finalized the reporting standard ARS 115.0 on capital adequacy with respect to the standardized measurement approach to operational risk for authorized deposit-taking institutions in Australia.
ECB published a guide that outlines the principles and methods for calculating the penalties for regulatory breaches of prudential requirements by banks.
MAS and The Association of Banks in Singapore (ABS) jointly issued a paper that sets out good practices for the management of operational and other risks stemming from new work arrangements adopted by financial institutions amid the COVID-19 pandemic.
ACPR announced that a new data collection application, called DLPP (Datalake for Prudential), for collecting banking and insurance prudential data will go into production on April 12, 2021.
BCB announced that the Financial Stability Committee decided to maintain the countercyclical capital buffer (CCyB) for Brazil at 0%, at least until the end of 2021.
EIOPA has launched a European-wide comparative study on non-life underwriting risk in internal models, also kicking-off of the data collection phase.
SRB published an overview of the resolution tools available in the Banking Union and their impact on a bank’s ability to maintain continuity of access to financial market infrastructure services in resolution.
EBA is consulting on the implementing technical standards for Pillar 3 disclosures on environmental, social, and governance (ESG) risks, as set out in requirements under Article 449a of the Capital Requirements Regulation (CRR).
ESAs Issue Advice on KPIs on Sustainability for Nonfinancial Reporting