EBA and ECB launch 2023 EU-wide stress tests

The European Banking Authority has launched its EU-wide stress test for 2023, an exercise which assesses the solvency and resilience of EU banks under a hypothetical adverse macroeconomic scenario over a three-year horizon. This year’s test is particularly noteworthy as it includes for the first time European entities of third country banks which will help banks and supervisors to understand the commonalities and differences across jurisdictions. The EBA expects to publish the results of the exercise at the end of July 2023.

The adverse scenario is based on a narrative of hypothetical heightened geopolitical tensions, with high inflation and higher interest rates. In terms of GDP decline, the 2023 adverse scenario is the most severe used in the EU-wide stress up to now. The stress test will be conducted on a sample of 70 EU banks, 20 more than in 2021, representing 75% of the EU’s total banking assets.

AFME has published a statement welcoming the stress test noting that it will give “insights into one of the most pressing macro-financial issues, i.e. the reversal of interest rate levels back towards long-term trends. However, this year’s EBA methodology puts undue restrictions on bank’s interest earning capacity, which may negatively impact the assessment of banks by their investors.”

A methodology, template guidance, template scenarios and FAQs are published on the EBA webpage here.

In parallel, the European Central Bank will conduct its own stress test for an additional 42 medium-sized banks that are not included in the EBA sample due to their smaller size but applying the same scenarios as well as elements of the EBA methodology. In the 2023 exercise banks will, for the first time, use prescribed parameters for net fee and commission income. Another novelty is that banks will report their provisions for expected losses at sectoral level based on sector-specific projections in the scenarios. The results will be used to update each bank’s Pillar 2 Guidance in the context of the Supervisory Review and Evaluation Process (SREP).