Featured Product

    ECB Paper on Macro-Prudential Stress Test of Euro Area Banking System

    July 02, 2019

    ECB published a paper that presents an approach to a macro-prudential stress test for the euro area banking system, comprising the 91 largest euro area credit institutions across 19 countries. The approach involves modeling banks’ reactions to changing economic conditions. It also examines the effects of adverse scenarios on economies and the financial system as a whole by acknowledging a broad set of interactions and interdependencies between banks, other market participants, and the real economy. The results highlight the importance of the starting level of bank capital, bank asset quality, and bank adjustments for the propagation of shocks to the financial sector and real economy.

    The paper presents stress test results in the baseline scenario and lays out the main results for the adverse scenario. All the summarized results are based on banks’ reactions to the original adverse scenario included in the 2018 EU-wide stress testing exercise. Next, the paper elaborates on selected aspects of the adverse and baseline scenarios along with the macro-prudential perspective. It also introduces estimates of the effect of triggering the second-round effects on output and the real economy more broadly. Finally, the paper discusses the potential role of non-banks in the transmission of the adverse scenario. 

    The report evaluates performance of the euro area banking sector in 2018-20 under the scenarios of the 2018 EBA supervisory stress test. The results complement the findings of the supervisory stress test. Compared with the results derived under the constant balance sheet assumption, banks’ system-wide capital depletion in the adverse scenario is higher in the macro-prudential stress test. When comparing adverse system-wide common equity tier 1 (CET1) capital levels in 2020 against the end of 2017, the macro-prudential stress test reveals a EUR 35 billion higher capital depletion then the analogous constant balance sheet exercise for the same sample of banks. However, because of banks’ deleveraging, CET1 ratios are on average higher in the macro-prudential stress test. Compared with the 2018 Financial Sector Assessment Program (FSAP) stress test results, the timing of the impact on bank solvency differs. FSAP foresees a gradual impact of the adverse scenario on banks’ capital, in contrast to the more front-loaded impact in the macro-prudential stress test. The prediction of relatively lower capital ratios by the FSAP is mainly driven by higher severity for certain high-spread economies and by the less pronounced deleveraging of banks facing strained capital levels.

    Banks experiencing a CET1 capital shortfall compared with their capital requirement decrease their lending to a relatively greater degree than do banks with a CET1 surplus. Accordingly, loan growth of a large share of banks in the adverse scenario is negative, especially in the case of non-financial corporations. Interbank contagion may advance the deterioration of banks’ capital shortfalls. A contagion mechanism related to the direct interconnectedness between banks could lead to an additional CET1 ratio depletion amounting to 75 basis points by the end of 2020. This estimate involves both solvency and liquidity distress and assumes a default on bilateral exposures and short-term funding withdrawal by those banks experiencing capital shortfalls. The paper also evaluates the effect of adding the feedback loops between the financial and real sectors, in addition to the interactions between banks and other counterparties in financial and capital markets.

     

    Related Link: ECB Paper (PDF)

     

    Keywords: Europe, EU, Banking, Stress Testing, CET 1, FSAP, Macro-Prudential Policy, Adverse Scenario, Baseline Scenario, EBA, ECB

    Featured Experts
    Related Articles
    News

    ECB Further Reviews Costs and Benefits Associated with IReF

    The European Central Bank (ECB) is undertaking the integrated reporting framework (IReF) project to integrate statistical requirements for banks into a standardized reporting framework that would be applicable across the euro area and adopted by authorities in other EU member states.

    September 15, 2022 WebPage Regulatory News
    News

    BCBS to Finalize Crypto Rules by End-2022; US to Propose Basel 3 Rules

    The Basel Committee on Banking Supervision met, shortly after a gathering of the Group of Central Bank Governors and Heads of Supervision (GHOS), the oversight body of BCBS.

    September 15, 2022 WebPage Regulatory News
    News

    IOSCO Welcomes Work on Sustainability-Related Corporate Reporting

    The International Organization of Securities Commissions (IOSCO) welcomed the work of the international audit and assurance standard setters—the International Auditing and Assurance Standards Board (IAASB)

    September 15, 2022 WebPage Regulatory News
    News

    EBA Publishes Funding Plans Report, Receives EMAS Certification

    The European Banking Authority (EBA) has been awarded the top European Standard for its environmental performance under the European Eco-Management and Audit Scheme (EMAS).

    September 15, 2022 WebPage Regulatory News
    News

    BoE Allows One-Day Delay in Statistical Data Submissions by Banks

    The Bank of England (BoE) published a Statistical Notice (2022/18), which informs that due to the Bank Holiday granted for Her Majesty Queen Elizabeth II’s State Funeral on Monday September 19, 2022.

    September 14, 2022 WebPage Regulatory News
    News

    ACPR Amends Reporting Module Timelines Under EBA Framework 3.2

    The French Prudential Control and Resolution Authority (ACPR) announced that the European Banking Authority (EBA) has updated its filing rules and the implementation dates for certain modules of the EBA reporting framework 3.2.

    September 14, 2022 WebPage Regulatory News
    News

    APRA to Modernize Prudential Architecture, Reduces Liquidity Facility

    The Australian Prudential Regulation Authority (APRA) announced reduction in the aggregate Committed Liquidity Facility (CLF) for authorized deposit-taking entities to ~USD 33 billion on September 01, 2022.

    September 12, 2022 WebPage Regulatory News
    News

    PBC Issues List of Systemic Banks, Adds 2 Foreign Banks to CERB List

    The China Banking and Insurance Regulatory Commission (CBIRC) published the administrative measures for internal control of wealth management companies, which come into force on the day of promulgation.

    September 09, 2022 WebPage Regulatory News
    News

    PRA Publishes Discussion Paper on Its Future Approach to Policy

    The Prudential Regulation Authority (PRA) proposed its approach to policy-making as it takes on wider rulemaking responsibilities under the Financial Services and Markets Bill.

    September 08, 2022 WebPage Regulatory News
    News

    ECB Publishes Opinion on Proposed Regulation on Data Act

    The European Central Bank (ECB) published its opinion on the proposal for a regulation on harmonized rules on fair access to and use of data (Data Act).

    September 08, 2022 WebPage Regulatory News
    RESULTS 1 - 10 OF 8511