EBA Launches Stress Test to Access Resilience of the European Banking Sector

The European Banking Authority (EBA) has launched 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.

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.