Featured Product

    EBA Publishes Results of 2021 Stress Test Exercise for Banks

    The European Banking Authority (EBA) and the European Central Bank (ECB) published results of the EU-wide stress test for 2021. Overall, the stress test exercise covered 89 banks that are all supervised by ECB: these comprise 38 euro area banks that are part of the EU-wide stress test led by EBA and a further 51 medium-size euro area banks. Together they represent slightly more than 75% of the total banking assets in the euro area, as per the ECB notification. The competent authorities are expected to use results of the stress test to assess the ability of banks to meet applicable minimum and additional own funds requirements under the common downturn scenarios and assumptions. In parallel to its 2021 EU‐wide stress test, EBA continued working to improve the existing stress testing framework, with a final decision on potential changes to the framework expected later in 2021 and the implementation of these changes expected in the 2023 EU‐wide stress test.

    ECB notes that the results of the 2021 stress test show that the euro area banking system is resilient to adverse economic developments. For the 38 banks tested by the EBA, the average common equity tier 1 capital ratio fell by 5 percentage points from 14.7% to stand at 9.7%. The 51 medium-size banks tested solely by ECB showed an average capital depletion of 6.8 percentage points to 11.3%, from a starting point of 18.1%. The results show that the first key driver of the capital depletion was credit risk, because the economic shock in the adverse scenario led to loan losses. Despite the overall resilience of the banking system, new challenges have emerged from the COVID-19 pandemic and banks need to ensure that they properly measure and manage credit risk. The second main driver of capital depletion was market risk while the third driver was the limited ability to generate income under adverse economic conditions. ECB also noted that this year the Banking Supervision will apply a new methodology to determine the Pillar 2 Guidance. The Pillar 2 Guidance is a supervisory recommendation that tells banks how much capital they are expected to maintain to be able to withstand stressed situations. ECB intends to give banks sufficient time to replenish their capital if the Pillar 2 Guidance levels increase.

    As per EBA, this year’s stress test is characterized by an adverse scenario that assumes a prolonged COVID-19 scenario in a “lower for longer” interest rate environment. With a cumulative drop in GDP over the three-year horizon by 3.6% in European Union and a negative cumulative drop in the GDP of every member state, the 2021 adverse scenario is very severe, also having in mind the weaker macroeconomic starting point in 2020 as a result of the pandemic. The baseline scenario also provides some comparable information about individual banks in the context of a gradual exit from the pandemic. Under the adverse scenario, the banking system would see its common equity tier 1 capital reduced by 485 bps on a fully loaded basis after three years, while staying above 10% (against the starting ratio of 15%). The results also show dispersion across banks, with the banks that are more focused on domestic activities or with lower net interest income displaying a higher depletion. The overall impact results in a common equity tier 1 depletion of EUR 265 billion and in an increase of the total risk exposure amount of EUR 868 billion at the end of the three-year horizon, resulting in a 485 bps decrease in the common equity tier 1 ratio. The key risk drivers contributing to the overall impact on common equity tier 1 capital ratio on a fully loaded basis include credit risk losses (of EUR 308 billion); market risk losses, including counterparty credit risk (EUR 74 billion); and operational risk losses, including conduct risk (EUR 49 billion). With respect to the COVID-19 support, the results show a higher increase of the stage 3 ratio over the stress test horizon for loans under moratoria (from 3.1% to 13.4%). For exposures under the Public Guarantee Scheme, the stage 3 ratio reaches 6.8% in 2023 (1.1% in 2020).


    Related Links

    Keywords: Europe, EU, Banking, Stress Testing, COVID-19, Regulatory Capital, Stress Test Results, Credit Risk, Market Risk, Operational Risk, FAQ, Counterparty Credit Risk, Pillar 2, SREP, ECB, EBA

    Featured Experts
    Related Articles

    EBA Clarifies Use of COVID-19-Impacted Data for IRB Credit Risk Models

    The European Banking Authority (EBA) published four draft principles to support supervisory efforts in assessing the representativeness of COVID-19-impacted data for banks using the internal ratings based (IRB) credit risk models.

    June 21, 2022 WebPage Regulatory News

    BIS Hub Updates Work Program for 2022, Announces New Projects

    The Bank for International Settlements (BIS) Innovation Hub updated its work program, announcing a set of projects across various centers.

    June 17, 2022 WebPage Regulatory News

    US Senate Members Seek Details on SEC Proposed Climate Disclosure Rule

    Certain members of the U.S. Senate Committee on Banking, Housing, and Urban Affairs issued a letter to the Securities and Exchange Commission (SEC)

    June 16, 2022 WebPage Regulatory News

    EIOPA Consults on Review of Securitization Framework in Solvency II

    The European Insurance and Occupational Pensions Authority (EIOPA) published a consultation paper on the advice on the review of the securitization prudential framework in Solvency II.

    June 16, 2022 WebPage Regulatory News

    UK Authorities Issue Regulatory and Reporting Updates for Banks

    The Prudential Regulation Authority (PRA) issued a statement on PRA buffer adjustment while the Bank of England (BoE) published a notice on the statistical reporting requirements for banks.

    June 15, 2022 WebPage Regulatory News

    BaFin Consults on Resolvability Requirements for Resolution Planning

    The Federal Financial Supervisory Authority of Germany (BaFin) proposed to amend the “Capital Investment Conduct And Organization Ordinance” and issued a draft circular on the minimum resolvability requirements for resolution planning.

    June 10, 2022 WebPage Regulatory News

    EBA Consults on Certain Standards and Guidelines Under CRR and BRRD

    The European Banking Authority (EBA) proposed guidelines, for the resolution authorities, on the publication of the write-down and conversion and bail-in exchange mechanic, with the comment period ending on September 07, 2022.

    June 08, 2022 WebPage Regulatory News

    OJK Publishes Regulatory Updates for Financial Sector Entities

    The Financial Services Authority of Indonesia (OJK) is strengthening cooperation with the Australian Prudential Regulation Authority (APRA) and the Japanese Financial Services Agency (JFSA)

    June 03, 2022 WebPage Regulatory News

    EU Publishes Rules on DLT and Data Governance

    The European Parliament and the Council published Regulation 2022/868 on European data governance (Data Governance Act).

    June 03, 2022 WebPage Regulatory News

    EBA Publishes Phase 2 of Reporting Framework 3.2

    The European Banking Authority (EBA) published phase 2 of its reporting framework 3.2. The technical package supports the implementation of the updated reporting framework by providing standard specifications

    June 03, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8267