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EBA 2014 EU-Wide Stress Test Summary

Core Content

The European Banking Authority (EBA) published the methodology and macroeconomic scenarios for the 2014 EU-wide stress test on 29 April 2014. This stress test aims to evaluate the resilience of EU banks to hypothetical external shocks, identify remaining vulnerabilities, and provide a high level of transparency regarding their exposures.

The test occurs during the ongoing process of EU banks' balance sheet repair and follows asset quality reviews (AQRs) conducted by national competent authorities. The EBA's common methodology ensures consistency across all EU supervisory authorities, allowing for comparable results and supporting the work of supervisors.

Main Views and Key Information

Key Features of the Methodology

• Risk Coverage: The methodology addresses credit and market risks, exposures towards securitisation, sovereign and funding risks.
• Restrictive Approach: It is designed to be restrictive, incorporating key constraints such as:
  • Static balance sheet assumption (no defensive actions by banks)
  • Prescribed approaches to market risk and securitisation
  • Caps and floors on net interest income, risk weighted assets (RWAs), and net trading income
• Sovereign Shock: A shock that affects the entire balance sheet of banks, including their available for sale portfolio (AFS), through the gradual phase-out of prudential filters.
• Funding Cost Shock: A conservative asymmetric shock to banks' funding costs that impacts both asset and liability sides.

Adverse Scenario

The adverse scenario, developed by the European Systemic Risk Board (ESRB), reflects the most pertinent systemic risks to the EU banking sector. These include:

1. Global Bond Yield Increase: Amplified by an abrupt reversal in risk assessment, especially towards emerging market economies.
2. Credit Quality Deterioration: In countries with weak demand.
3. Stalling Policy Reforms: Threatening confidence in public finances.
4. Lack of Balance Sheet Repair: Affecting the ability of banks to maintain affordable market funding.
5. Commercial Real Estate Stress: And a foreign exchange shock in Central and Eastern Europe.

Economic Impact

• EU GDP Deviation: The adverse scenario leads to a cumulative deviation of EU GDP from its baseline level of:
  • $-2.2%$ in 2014
  • $-5.6%$ in 2015
  • $-7.0%$ in 2016
• Unemployment Increase: EU unemployment rises by:
  • 0.6 percentage points in 2014
  • 1.9 percentage points in 2015
  • 2.9 percentage points in 2016
• Advanced Economies: For most advanced economies, including Japan and the US, the scenario results in a cumulative GDP response of 5-6% below baseline.

Process Overview

• Sample of Banks: The stress test will be conducted on a sample of 124 EU banks, which collectively cover at least 50% of each national banking sector.
• Consolidation Level: The test will be run at the highest level of consolidation.
• Cooperation: The EBA will work closely with national competent authorities (CAs), including the European Central Bank (ECB), especially in SSM countries.
• Coordination and Transparency: The EBA will coordinate the exercise and serve as a data hub for transparency in results.
• Supervisory Responsibility: CAs will oversee the exercise with banks, check the quality of results, and identify and implement any necessary supervisory measures.

Conclusion

The EBA's 2014 EU-wide stress test is a critical tool for assessing the resilience of the EU banking sector against systemic risks. By using a common methodology and macroeconomic scenarios, it ensures consistency, transparency, and comparability across the EU. The results will provide valuable insights into the state of EU banks and guide future supervisory actions.