EBA launched the 2020 EU-wide stress test and released the associated macroeconomic scenarios. The additional documents published by EBA include methodological note, template, template guidance, and frequently asked questions on the stress test exercise. ESRB and ECB—in close cooperation with EBA, competent authorities, and national central banks—have developed the adverse macroeconomic scenario. The results of the stress testing exercise are expected to be published by July 31, 2020.
The 2020 stress test methodology was published in November 2019 and is to be applied to the released scenarios. The baseline scenario for EU countries is based on the projections from the national central banks of December 2019, while the adverse scenario assumes the materialization of the main financial stability risks that have been identified by ESRB and which the EU banking sector is exposed to. The adverse scenario follows, for the first time, a "lower for longer narrative," which involves a recession coupled with low or negative interest rates for a prolonged period. The real GDP in EU would decline by 4.3% cumulatively by 2022, resulting in the most severe scenario to date. The adverse scenario also reflects the recent risk assessments by EBA and outlines the evolution of key economic and financial variables in a hypothetical adverse situation, thus capturing the materialization of relevant risks to which the EU banking system is exposed. Detailed information about the adverse scenario can be found in the note published by ESRB.
The EU-wide stress test will be conducted on a sample of 51 EU banks—35 from countries under the jurisdiction of the Single Supervisory Mechanism or SSM—covering roughly 70% of the total banking sector assets in the EU and Norway, as expressed in terms of total consolidated assets as of end 2018. This year, UK banks will be included in the sample, as the 2020 EU-wide stress test takes place during the implementation period following the withdrawal of UK from EU. ECB will examine the 35 significant euro area banks as part of the 2020 EU-wide stress test coordinated by EBA. ECB will conduct its own stress test in parallel for the significant banks not covered by the EU-wide EBA stress test. This will also consider the smaller size and lower complexity of these institutions.
The stress test is designed to provide supervisors, banks, and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks to economic shocks. In line with the previous two exercises, no pass-fail threshold has been included, as the results of the exercise are designed to serve as an input to the Supervisory Review and Evaluation Process or SREP. 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. EBA, who is responsible for coordinating the whole exercise, developed a common methodology and will act as a data hub for the final dissemination of the results while competent authorities will assure the quality of the results and decide on any necessary supervisory reaction measure as part of the SREP process. ECB will cross-check the bottom-up stress test submissions of banks with its own top-down stress-testing framework to assess the macro-prudential implications of the exercise.
- EBA Press Release and Related Documents
- ESRB Note on Macro-Financial Scenarios (PDF)
- ECB Press Release
- Overview of EU-Wide Stress Testing
Keywords: Europe, EU, Banking, Stress Testing, EU-Wide Stress Test, 2020 Stress Test, SREP, SSM, ESRB, ECB, EBA
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