Publication alert: EBA - 2023 EU-wide stress test methodology
We communicate that the European Banking Authority (EBA) has published the following documents:
2023 EU-wide stress test - Draft Methodological Note
2023 EU-wide Stress Test – Draft Template Guidance
2023 EU-wide Stress Test – Draft Templates
1. Context
The EBA is required to initiate and coordinate EU-wide stress tests. The objective of the EU-wide stress test is to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks and the EU banking system to shocks, and to challenge the capital position of EU banks. In March 2020, the EBA decided to postpone the EU-wide stress test exercise to 2021 to allow banks to focus on and ensure continuity of their core operations, including support for their customers. The exercise was launched in January 2021 and the results were published in July of the same year.
In this context, the EBA has published its 2023 EU-wide stress test draft methodology, templates and template guidance. The methodology covers all risk areas and builds on the one prepared for the 2021 EU wide stress test. Some aspects of the methodology have been improved based on the lessons learned from the previous exercise. As a new feature, the projections on net fee and commission income (NFCI) will be based on a top-down model. This is a first step of revising the EU-wide stress test framework towards a hybrid (bottom-up and top-down) approach.
2. Main points
Sample of banks and scope of consolidation.
- The sample for the 2023 EU-wide stress test has been enlarged compared to previous exercises. 26 more banks than in the 2021 exercise will participate, which is a total of 76 banks covering 75% of the banking sector in the euro area, each non-euro area EU Member State and Norway, which is a 5% higher than the previous exercise. Due to specific business models, certain banks have been excluded from the sample (according to their total assets would have been included).
- To be included in the sample, banks have to hold a minimum of €30 billion in assets. Nonetheless, Competent Authorities (CAs) could request to include additional institutions in their jurisdiction.
- The scope of consolidation is the perimeter of the banking group as defined by the CRR/CRD.
Macroeconomic scenarios and reference date. The stress test includes a baseline scenario and an adverse scenario. The exercise is carried out on the basis of year-end 2022 figures, and the scenarios will be applied over a period of 3 years from end 2023 to end 2025.
Risk coverage.
- Banks are required to stress test the following common set of risks:
- Credit risk, including securitisation.
- Market risk, counterparty credit risk (CCR) and credit valuation adjustment (CVA).
- Operational risk, including conduct risk.
- Banks are also requested to project the effect of the scenarios on net interest income (NII) and to stress P&L and capital items not covered by other risk types. In this regard, and as a novelty, impact on NFCI is projected using prescribed growth rate parameters.
- The risks arising from sovereign exposures are covered in credit risk and in market risk, depending on their accounting treatment.
Regulatory regime and hurdle rates.
- The impact of the EU-wide stress test will be reported in terms of CET1. In addition, the Tier 1 capital ratio and total capital ratio, as well as the leverage ratio, will be reported for every year of the exercise.
- Like in the 2016, 2018 and 2021 stress test, no hurdle rates or capital thresholds are defined for the purpose of the exercise. CAs will apply the results as an input to the SREP.
Process. It involves close cooperation between the EBA, the CAs and the ECB, as well as the European Systemic Risk Board (ESRB) and the European Commission (EC).
- The ESRB and the ECB develop the adverse macroeconomic scenario and any risk type specific shocks linked to it.
- The ECB supplies the macroeconomic baseline scenario.
- The EBA coordinates the exercise, defines the common methodology as well as the minimum quality assurance guidance for competent authorities.
- The CAs are responsible for the quality assurance process.
Main changes on the templates.
- An additional tab is required (CSV-LR-MDA) containing the calculation of the Leverage Ratio (LR) Maximum Distributable Amount (MDA), taking into account the requirements for G-SIIs. G-SIIs are expected to complete this template after having filled in the template CSV_MDA. All other banks shall leave this template empty.
3. Next steps
The final methodology will be published by the end of 2022.
The exercise will be launched in January 2023 and the results are expected to be published by the end of July 2023