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).
- ECB Press Release
- ECB Summary of Results (PDF)
- ECB Pillar 2 Guidance
- EBA Press Release
- EBA Report on Stress Test Results (PDF)
- EBA FAQs on Stress Test (PDF)
- EBA Summary of Results (PDF)
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
Previous ArticlePRA Issues Supervisory Disclosures, Extends CP10/21 Comment Period
The European Banking Authority (EBA) has published the final templates, and the associated guidance, for collecting climate-related data for the one-off Fit-for-55 climate risk scenario analysis.
The European Banking Authority (EBA) recently published a report that recommends enhancements to the Pillar 1 framework, under the prudential rules, to capture environmental and social risks.
As a follow on from its prudential standard on the treatment of crypto-asset exposures, the Basel Committee on Banking Supervision (BCBS) proposed disclosure requirements for crypto-asset exposures of banks.
The Basel Committee on Banking Supervision (BCBS) and the European Banking Authority (EBA) have published results of the Basel III monitoring exercise.
The Prudential Regulation Authority (PRA) recently issued a few regulatory updates for banks, with the updated Basel implementation timelines being the key among them.
The U.S. Department of the Treasury has recently set out the principles for net-zero financing and investment.
The European Commission (EC) launched a stakeholder survey on the draft International Guiding Principles for organizations developing advanced artificial intelligence (AI) systems.
The finalization of the two sustainability disclosure standards—IFRS S1 and IFRS S2—is expected to be a significant step forward in the harmonization of sustainability disclosures worldwide.
Decentralized finance (DeFi) is expected to increase in prominence, finding traction in use cases such as lending, trading, and investing, without the intermediation of traditional financial institutions.
The Basel Committee on Banking Supervision (BCBS) published reports that assessed the overall implementation of the net stable funding ratio (NSFR) and the large exposures rules in the U.S.