2018 EU-wide Stress Test Draft Methodology

Dr. Priscilla Mifsud Parker | Published on 21 Jun 2017

Banking And Finance 720X242

On the 7th of June, 2017 the European Banking Authority (“EBA”) published its 2018 EU-wide Stress Test Draft Methodology and templates for discussion with the industry. The exercise will address 70% of the European Union Banking Industry. Such methodology will assess the capacity of the EU’s banks to meet supervisory capital requirements and ratios during an adverse economic shock. As a main novelty such methodology will incorporate, for the first time, IFRS 9 accounting standards. The result will provide the 2018 Supervisory Review and Evaluation Process ('SREP') with valuable information which could potentially lead to new relevant supervisory and/or regulatory changes. The above mentioned stress test will be performed on a high level of consolidation, since it will cover forty-nine (49) EU banks, among which thirty-five (35) fall under the jurisdiction of the Single Supervisory Mechanism.

Objective and approach

The aim of the EU-wide stress test is to structure a common analytical framework to consistently compare and assess the resilience of EU banks and of the banking system as a whole. The exercise is based on a common methodology and a set of templates that include starting point data and stress test results. The good standing of EU banks will be assessed on a macroeconomic base and adverse scenario based on year-end 2017 figures, applied over a period of three-years.

Methodology and templates

The test is particularly focused on the evaluation of the impact of risk drivers on the solvency of banks. Credit institutions are required to undertake stress tests on a common set of risks including:

• Credit risk; 
• Market and counterparty risk; and
• Operational risk (including conduct risk).

The current draft methodology can be seen as a continuation of approach taken in 2016 with some adjustments due to the implementation of IFRS9.

The Process

The 2018 EU-wide stress test will be carried out with the close cooperation of the EBA, the European Central Bank  (“ECB”), the European Systemic Risk Board (“ESRB”), the Member State Competent Authority and the European Commission. The macroeconomic adverse scenario together with any related specific economic shock will be developed by the ERSB and the ECB in close cooperation with the national supervisory authorities and the European Central Bank. Furthermore, the EBA will act as a coordinator of all the different entities involved in such operations, also operating as the data hub for the effective communication of the achieved outcomes on a bank-by-bank level. The final methodology will be published as the exercise is launched, at the beginning of 2018, and the results to be published in mid-year 2018.

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Key Contacts

Dr Jean-Philippe Chetcuti

Senior Partner, Tax & Immigration

+356 22056111

Dr Priscilla Mifsud Parker

Senior Partner, Corporate, Tax & Immigration

+356 22056122

Dr Charlene Mifsud

Partner, Corporate & Commercial

+356 2205 6298

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