EBA launches 2021 EU-wide stress test exercise

29 January 2021

  • The adverse scenario reflects ongoing concerns about the possible evolution of the COVID-19 pandemic coupled with a potential strong drop in confidence;
  • The adverse scenario is designed to ensure an adequate level of severity across all EU countries;
  • The EU-wide stress test will be conducted on a sample of 50 EU banks covering 70% of total banking assets in the EU.

The European Banking Authority (EBA) launched today the 2021 EU-wide stress test and released the macroeconomic scenarios. Following the postponement of the 2020 exercise, due to the COVID-19 pandemic, this year’s EU-wide stress test will provide valuable input for assessing the resilience of the European banking sector. Accordingly, the adverse scenario is based on a narrative of a prolonged COVID-19 scenario in a ‘lower for longer’ interest rate environment, in which negative confidence shocks would prolong the economic contraction. The EBA expects to publish the results of the exercise by 31 July 2021.

Key features of the exercise

The exercise assesses the impact of an adverse macroeconomic scenario on the solvency of EU banks. The stress test allows supervisors to assess if banks’ capital buffers, which have been accumulated in recent years, are sufficient to cover losses and support the economy in stressed times. Moreover, the exercise fosters market discipline through the publication of consistent and granular data at a bank-by-bank level, which is crucial particularly at times of increased uncertainty in the markets. The results of the exercise are an input to the Supervisory Review and Evaluation Process (SREP).

The EU-wide stress test will be conducted on a sample of 50 EU banks – 38 from countries under the jurisdiction of the Single Supervisory Mechanism (SSM) – covering roughly 70% of total banking sector assets in the EU and Norway, as expressed in terms of total consolidated assets as of end 2019.

Given the specific macroeconomic conditions caused by the COVID-19 pandemics coupled with a high degree of uncertainty, this year, the focus on the different objectives will depend on the conditions closer to the publication date. The outcome might also provide valuable input to make informed decisions on possible exit strategies from the flexibility measures granted to banks due to the COVID-19 crisis, or on the need for additional measures, should the economic conditions deteriorate further.

Key elements of the scenarios

The baseline scenario for EU countries is based on the projections from the national central banks of December 2020, while the adverse scenario assumes the materialisation of the main financial stability risks that have been identified by the European Systemic Risk Board (ESRB) and which the EU banking sector is exposed to. The adverse scenario also reflects recent risk assessments by the EBA.

The narrative depicts an adverse scenario[1] related to the ongoing concerns about the possible evolution of the COVID-19 pandemic coupled with a strong drop in confidence leading to a prolongation of the worldwide economic contraction.[2] The worsening of economic prospects is reflected in a global decline of long-term risk-free rates from an already historically low level and results in a sustained drop in GDP and an increase in unemployment. Slowing growth momentum would cause a drop in corporate earnings leading, together with a re-assessment of market participants’ expectations, to an abrupt and sizeable adjustment of financial asset valuations as well as a significant drop in residential and commercial real estate prices. A decline in economic growth and rising risk premia could further challenge debt sustainability in the public and private sectors across the EU.

The adverse scenario is designed to ensure an adequate level of severity across all EU countries. By 2023, at EU level, the real GDP would decline by 3.6% cumulatively, unemployment rate would rise by 4.7 percentage points, residential real estate prices would decline by 16.1 %, and commercial real estate prices would decline by 31.2%. Equity prices in global financial markets would fall by 50% in advanced economies and by 65% in emerging economies in the first year.  The 2021 adverse scenario is very severe having in mind the weaker macroeconomic starting point in 2020 as a result of the severe pandemic-induced recession.

Notes for editors

  • The EBA’s 2021 stress test methodology was published in November 2020 and is to be applied to the scenarios released today.
  • The full sample[3] of 50 EU banks participating in this year exercise can be found in the following link.
  • The exercise will be run at the highest level of consolidation. This exercise will involve close cooperation between the EBA and the competent authorities (including the SSM, the ECB and the ESRB).
  • Detailed information about the adverse scenario can be found in the note produced by the European Systemic Risk Board (ESRB)[4].

 


[1] The convention used in the calibration of adverse scenarios for EBA stress tests is one of “no policy change”. This means that neither monetary policy nor fiscal policy reactions are assumed under the adverse scenario over and above what is already embedded in the baseline scenario.

[2] These confidence shocks could be triggered by a mutation of the virus, significant setbacks in the distribution or acceptance of vaccines, possible further lockdowns following re-emerging waves of infections and/or other unexpected negative developments in the containment of the pandemic.

[3] In the package that was published today, the sample has been revised. BFA Tenedora De Acciones S.A.U. and CaixaBank, S.A. have been excluded from the sample, because they have agreed on a merger that will take place in 2021. The two banks were replaced by the following banks (country abbreviation are in the brackets): Bankinter, S.A. (ES), Mediobanca – Banca di Credito Finanziario S.p.A. (IT) and Banco Comercial Português, SA (PT).

[4] The Macro-economic scenario has been amended on 12 February 2021. In particular, a correction of HICP and other consumption price indices on page 15 has been applied only for the United Kingdom

[5] The excel version of the market risk shocks has been updated on 1 March 2021 to amend an inconsistency in the tab called “All_shocks_column”

 

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Franca Rosa Congiu

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