In December 2016, the EBA announced its decision to carry out an EU-wide stress test in 2018, which aims to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks to shocks and to challenge the capital position of EU banks.

In this regard, the EBA has published the 2018 EU-wide stress test final methodology, describing how banks should calculate the stress impact of the common scenarios. The list of institutions participating in the exercise is also included.

This exercise is designed to inform the Supervisory Review and Evaluation Process (SREP) that competent authorities (CAs) will carry out in 2018, and will consider, for the first time, the impact of the implementation of IFRS 9.

The Technical Note prepared by Management Solutions’ R&D department includes an analysis of the main content of this document.

Executive Summary

As in previous years, the 2018 EU-wide stress test will be conducted as a bottom-up exercise and assuming a static balance sheet. It will not be a pass-fail exercise, but an input for the SREP. The methodology covers all relevant risk areas and, for the first time, considers IFRS 9.

Scope of application

The stress test will cover 49 EU banks, which broadly cover 70% of the banking sector in the euro area, each non-euro area EU Member State and Norway.

Main content

  • Bottom-up approach and static balance sheet.
    • The 2018 exercise will be conducted by banks following a bottom-up approach. Thus, banks are required to project the impact of the defined scenarios but are subject to strict constraints.
    • The EU-wide stress test is conducted on the assumption of a static balance sheet.
    • Banks under restructuring are subject to the same assumptions.
  • Risk coverage and accounting.
    • Banks are required to stress: credit risk (incl. securitisations); market risk, CCR and CVA; and operational risk and conduct.
    • Banks are also required to stress NII and to stress P&L and capital items.
    • All projections shall be carried out on the basis of the applicable accounting valid on 1 January 2018. Thus, for the first time it considers IFRS 9.
  • Common baseline and adverse scenarios.
    • The exercise includes two common scenarios: a baseline scenario and an adverse scenario.
    • The exercise is carried out on the basis of year-end 2017 figures, over a period of 3 years (end 2018 to end 2020).
    • The impact will be reported in terms of CET1 capital. In addition, the Tier 1 capital ratio and total capital ratio, as well as a leverage ratio, will be reported.
  • Not a ‘pass-fail exercise’ but an input for SREP.
    • The exercise will not be a pass-fail exercise (i.e. no hurdle rates or capital thresholds are defined for the purpose of the exercise).
    • However, CAs will apply stress test results as an input to the SREP.

Download the technical note by clicking here.