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    EBA Launches Stress Tests for Banks, Issues Other Updates

    January 31, 2023

    The European Banking Authority (EBA) launched the 2023 European Union (EU)-wide stress test, published annual reports on minimum requirement for own funds and eligible liabilities (MREL) and high earners with data as of December 2021, issued response on the prudential treatment of legacy instruments held by DNB Bank ASA, and updated the Single Rulebook Question and Answer (Q&A) tool in the month of January 2023. The European Central Bank (ECB) will also conduct its own stress test for another 42 medium-size banks that are not included in the EBA-led stress test sample due to their smaller size. A list of these banks has been published too.

    With respect to the 2023 EU-wide stress tests, EBA has published the macroeconomic scenarios, other related methodology documents, and announced that it expects to publish the results of the exercise at the end of July 2023. The EU-wide stress test will be conducted on a sample of 70 EU banks, with 57 banks from countries that are members of the Single Supervisory Mechanism (SSM), which cover roughly 75% of the banking sector assets in the EU and Norway. Compared to the previous EU-wide stress tests, the 2023 exercise covers an additional 20 banks. The stress test aims to assesses the solvency of EU banks in a hypothetical adverse macroeconomic scenario over a three-year horizon (2023-25). The exercise is based on a common methodology, internally consistent and relevant scenarios, and a set of templates that capture starting point data and stress test results to allow a rigorous assessment of the banks in the sample. The objectives of the stress test are to:

    • assess and compare the overall resilience of EU banks to relevant severe economic shocks.
    • assess if bank capital levels are sufficient to ensure banks can support the economy in periods of stress.
    • foster market discipline through transparent publication of consistent, granular and comparable data at a bank-by-bank level.
    • provide input to the Supervisory Review and Evaluation Process (SREP) for competent supervisory authorities.

    The ESRB, in close cooperation with ECB, national competent authorities, EBA, and the national central banks, is responsible for designing both the baseline and adverse macroeconomic scenarios. The baseline for EU countries is based on the December 2022 projections from the national central banks, while the adverse scenario is developed by the ESRB Task Force on Stress Testing, in close collaboration with ECB, and is approved by the ESRB General Board. The competent authorities, including the Single Supervisory Mechanism (SSM), are responsible for ensuring that banks correctly apply the common methodology developed by EBA. The 2023 exercise is based mainly on bottom-up projections from banks subject to constraints and a static balance sheet approach. The methodology has undergone some important enhancements compared to the one used for past stress test exercises. These enhancements include the incorporation of lessons learned from the previous exercise, the introduction of top-down elements for net fees and commissions income (NFCI), more detailed sectoral analysis, and an increased sample with larger coverage, as mentioned above. The changes are part of the medium-term plan of revising the stress test framework. The introduction of top-down elements for the projections of net fees and commissions income is part of the EBA work on the future changes to the EU-wide stress test. In parallel to the 2023 EU-wide stress test, EBA will continue working to improve the current framework and maximize the information value of the results.

    Below are the highlights of the additional key updates from EBA:

    • The EBA Single Rulebook Q&A updates for January 2023 set out answers to 32 questions. The updates cover queries on topics such as liquidity risk, cross-border resolution, authorization and registration, passporting, market infrastructures, securitization and covered bonds, strong customer authentication and common and secure communication, and supervisory reporting relating to FINREP, COREP, asset encumbrance, leverage ratio, and liquidity.
    • The report on MREL shows progress in closing MREL shortfalls, albeit at a lower rate for smaller banks, and concludes that the impact of MREL on banks’ profitability is manageable, although heterogeneous across types of banks and member states. Tightening funding conditions are not expected to represent major difficulties in the management of MREL resources for any specific type of banks (for example, business model, size). However, in relative terms, banks with poor structural profitability and weaker balance sheets may face more challenges than stronger institutions.
    • The report on high earners notes a significant increase in the number of high earners across EU banks in 2021. As variable remuneration is linked to the performance of the institution, business line and staff, the good financial performance of the institutions drove the increase of some bonuses. Other relevant factors supporting this trend may be identified in the relief of relevant COVID 19 restrictions and in the continuation of relocation of staff to the EU activities in the context of Brexit.
    • EBA also issued a response to the letters received from a law firm on the prudential treatment of legacy instruments held by the Norway-based DNB Bank ASA. EBA assessed that the prudential classification as Tier 2 instruments of legacy perpetual bonds (or Discos) cannot count as fully eligible Tier 2 instruments of DNB Bank ASA. EBA shared this assessment with the relevant competent authority for its own consideration as well as to be informed of the next steps it intends to take, particularly with regard to the EBA Opinion on legacy instruments and the cascading options it contains to address the so-called infection risk.


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    Keywords: Europe, Basel, Remuneration Benchmarking, Regulatory Capital, Banking, Legacy Instruments, EU, MREL, High Earners, Single Rulebook, Stress Testing, Reporting, SSM, DNB Bank ASA, EBA, ECB

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