EBA publishes the results of its 2023 EU-wide stress test

• The results of the 2023 EU-wide stress test show that European banks remain resilient under an adverse scenario which combines a severe EU and global recession, increasing interest rates and higher credit spreads.
• This resilience of EU banks partly reflects a solid capital position at the start of the exercise, with an average fully-loaded CET1 ratio of 15% which allows banks to withstand the capital depletion under the adverse scenario.
• The capital depletion under the adverse stress test scenario is 459 bps, resulting in a fully loaded CET1 ratio at the end of the scenario of 10.4%. Higher earnings and better asset quality at the beginning of the 2023 both help moderate capital depletion under the adverse scenario.
• Despite combined losses of EUR 496bn, EU banks remain sufficiently capitalised to continue to support the economy also in times of severe stress.
• The high current level of macroeconomic uncertainty shows however the importance of remaining vigilant and that both supervisors and banks should be prepared for a possible worsening of economic conditions.

The European Banking Authority (EBA) today published the results of its 2023 EU-wide stress test, which involved 70 banks from 16 EU and EEA countries, covering 75% of the EU banking sector assets. This stress test allows supervisors to assess the resilience of EU banks over a three-year horizon under both a baseline and an adverse scenario. The adverse scenario is characterised by severe negative shocks to economic growth, higher unemployment combined with higher interest rates and credit spreads. In terms of GDP decline, the 2023 adverse scenario is the most severe used in the EU wide stress up to now. The individual bank results promote market discipline and are used as part of the EU supervisory decision-making process.

This year’s stress test includes some important enhancements compared to past stress test exercises. These enhancements include an increased sample with 20 more banks, the introduction of top-down elements for net fees and commission income (NFCI), and a detailed analysis on banks’ sectoral exposures.

Summary of key results

Note: Bank projections are based on the accounting regime applicable as of 31 December 2022. IFRS 17 on insurance contracts which entered into force on 1 January 2023 was not considered. To ensure sufficient transparency banks were asked to provide their fully loaded CET1 capital ratio as of 1st January 2023 applying IFRS 17 in addition to their projections in certain cases.

Transparency and input to the Supervisory Review and Evaluation Process

The EBA published the granular bank results, including detailed information at the starting and end point of the exercise, under both the baseline and the adverse scenarios.

The EBA EU-wide stress test does not consider a pre-defined pass/fail threshold. It is, however, an important input for the Pillar 2 assessment of banks by their supervisors. The results of the stress test will assist Competent Authorities in assessing banks’ ability to meet applicable prudential requirements under the stress scenario and form a solid ground for discussion between the supervisor and the individual banks on their capital and distribution plans, in the context of the normal supervisory cycle.

Notes to the editors

• The EU-wide stress test is initiated and coordinated by the EBA and undertaken in cooperation with the EU Competent Authorities, including the European Central Bank (ECB) for the Banking Union, and the European Systemic Risk Board (ESRB).
• The EBA develops a common methodology and is responsible for the final dissemination of the outcome of the exercise. The adverse scenario is designed jointly by the ESRB and the ECB, and the baseline scenario is provided by the national central banks. Competent Authorities, including the ECB Banking Supervision for the euro area banks, are responsible for ensuring that banks correctly apply the common methodology. In particular, they are responsible for assessing the reliability and robustness of banks’ assumptions, data, estimates and results and the resulting supervisory actions.
• The EU-wide stress test is based on the implementation by the banks of the EBA methodology and the two scenarios, under the close scrutiny of their supervisors (“constrained bottom-up” exercise).