Featured Product

    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.


    Related Links


    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

    Featured Experts
    Related Articles

    BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks

    The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.

    March 13, 2023 WebPage Regulatory News

    OSFI Finalizes on Climate Risk Guideline, Issues Other Updates

    The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.

    March 12, 2023 WebPage Regulatory News

    BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending

    BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.

    March 03, 2023 WebPage Regulatory News

    HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks

    The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.

    March 02, 2023 WebPage Regulatory News

    BCBS Report Examines Impact of Basel III Framework for Banks

    The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.

    February 28, 2023 WebPage Regulatory News

    PRA Consults on Prudential Rules for "Simpler-Regime" Firms

    Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.

    February 28, 2023 WebPage Regulatory News

    DNB Publishes Multiple Reporting Updates for Banks

    DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.

    February 28, 2023 WebPage Regulatory News

    NBB Sets Out Climate Risk Expectations, Issues Reporting Updates

    The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting

    February 24, 2023 WebPage Regulatory News

    EBA Updates Address Securitization Standards and DGS Guidelines

    The European Banking Authority (EBA) published the final draft of the regulatory technical standards that set out conditions for assessment of homogeneity of the underlying exposures in simple, transparent, and standardized (STS) securitizations.

    February 21, 2023 WebPage Regulatory News

    FSB Publishes Letter to G20, Sets Out Work Priorities for 2023

    The Financial Stability Board (FSB) published a letter intended for the G20 Finance Ministers and Central Bank Governors, highlighting the work that FSB will take forward under the Indian G20 Presidency in 2023

    February 20, 2023 WebPage Regulatory News
    RESULTS 1 - 10 OF 8793