EBA launches 2016 EU-wide stress test exercise

Overview of exercise

EBA have launched the 2016 stress test exercise which will assess the resilience of EU banks and the EU banking system under a common macroeconomic baseline and adverse scenario. The common methodology defines how banks should calculate the stress impact of common scenarios and covers the period 2016 to 2018.

The sample of 51 banks selected covers around 70% of the EU banking sector. The threshold for inclusion in the sample is a minimum of EUR30bn in assets.

Adverse scenario

The adverse scenario reflects the 4 systemic risks identified by the ESRB as representing the most material threats to the stability of the EU financial sector:

1. An abrupt reversal of compressed global risk premia, amplified by low secondary market liquidity
2. Weak profitability prospects for banks and insurers in a low nominal growth environment, amid incomplete balance sheet adjustments
3. Rising of debt sustainability concerns in the public and non-financial private sectors, amid low nominal growth
4. Prospective stress in a rapidly growing shadow banking sector, amplified by spillover and liquidity risk.
   

Stress test results as an input into SREP

The new methodology has a different objective to the previous exercise carried out in 2014 which intended to identify possible capital shortfalls and require immediate recapitalisation actions. The 2016 test has no pass fail threshold to identify capital shortfalls given banks have emerged from the financial crisis.

Rather, the results will feed into the Supervisory Review and Evaluation Process (SREP) carried out by supervisors. The stress tests are designed to ensure banks have a sustainable business model in the face of turbulence.

How can we help?

Although Maltese banks are scoped out of the official EBA exercise, the SREP will involve a review of banks’ internal stress testing of capital and liquidity. This would be expected to be line with the new stress testing methodology. Furthermore, there should be interaction between the scenarios in the banks’ recovery plan and those used for internal stress testing.

Our team of regulatory compliance experts has extensive experience in stress testing and recovery planning, and can provide assistance in relation to SREP readiness.