2020 EU-wide stress test draft methodology

In January 2020, the EBA will initiate the EU-wide stress test that will be carry out until June 2020, 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 2020 EU-wide stress test draft 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 2020.

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 2020 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.

Area of application

• The stress test will cover 50 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.
• 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 2020 to end 2022).
  • 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 (document available in spanish).