EBA Releases Results of 2018 EU-Wide Stress Test


A report was recently published by the European Banking Authority (“EBA“) setting out the results of its 2018 EU-wide banking stress test which covered a sample of 48 banks in 15 countries in the EU and the EEA at the highest level of consolidation, representing about 70% of total EU banks’ total assets.

An overview of the key aggregate results and a description of the main drivers of the capital impact is provided by the report. Annex II includes a bank-by-bank summary of the results, while banks’ individual results are accessible on the EBA’s website.

The test has revised the credit risk methodology to cater for the implementation of IFRS 9 and the revision of the market risk methodology, which prescribes a common methodology for all fair value measurement portfolios under a single adverse scenario and includes specific provisions to stress level 2 and level 3 financial instruments, since the last test in 2016.

The report also includes FAQs, in which the EBA comments that, in comparison with the results of the 2016 stress test, the core equity tier 1 (“CET1“) ratio depletion is higher in 2018 than in 2016 and the impact on the CET1 ratio due to credit risk losses is also larger. It warns, however, that it is inaccurate to compare exercises across time, given the changes to the sample of banks, the starting capital ratios, scenarios and the methodological aspects.

The EBA states that the test is an important source of information for the purposes of the supervisory review process (“SREP“) and for setting Pillar 2 guidance. The results of the stress test will assist authorities in assessing banks’ ability to meet applicable prudential requirements under the stress scenario and provide a basis for discussions between supervisors and individual banks on management actions to strengthen their capital planning and ensure that the banks ware above the applicable capital requirements under stress.

The Bank of England (“BoE“) has published a statement, commenting that the results indicate that the four participating UK banks would be resilient to a severe economic and market stress. It will publish the results of the 2018 BoE stress test in December 2018.