What are deferred defects in manual tests
European banking regulators use stress tests to assess how well banks are prepared for economic and financial shocks. The supervisory authority can use the stress test results to identify the weaknesses of the banks and counteract these weaknesses at an early stage in the supervisory dialogue with the banks.
Types of stress tests
The ECB carries out a number of different stress tests:
- Annual stress tests
- Stress tests as part of comprehensive assessments, d. H. comprehensive reviews of banks' financial health, consisting of a stress test and an asset quality review. This is to ensure that banks have sufficient capital to cope with losses.
- Stress tests for macroprudential purposes (where the focus is not on individual banks but on financial stability and system-wide effects)
In addition, specific stress tests can also be carried out for individual banks or groups of banks if necessary.
Annual stress tests
According to EU law, the ECB is obliged to subject the supervised banks to a stress test at least once a year. The results of the annual stress tests are also incorporated into the SREP for the test year.
Capital Requirements Directive (CRD), Article 100
EU-wide stress tests by the EBA and SREP stress tests
Every two years, the EBA conducts EU-wide stress tests in cooperation with the ECB, the European Systemic Risk Board (ESRB) and the national supervisory authorities. The banks selected for the tests include the largest significant institutions directly supervised by the ECB. The stress tests are carried out using the EBA methodology and reporting forms. The scenarios and key assumptions are jointly developed by the EBA, the ESRB, the ECB and the European Commission. The EBA publishes both the individual and the aggregated results.
In the years in which the EBA carries out its EU-wide stress tests, the ECB subjects the banks under its direct supervision that are not included in the sample of the EU-wide EBA stress test to its own stress test. This test is part of the annual SREP process. The test uses the EBA methodology with the necessary adjustments being made for smaller institutions to allow proportionate treatment. The results are published by the ECB.
As part of the EU-wide stress test 2021 coordinated by the EBA, the ECB will examine 38 major banks in the euro area. The stress test was originally planned for 2020, but had to be postponed for a year due to the corona pandemic. The banks in question represent around 70% of total bank assets in the euro area. The EBA plans to publish the results of the individual banks by the end of July 2021. The ECB intends to carry out its own stress test parallel to the EBA stress test. In doing so, it will examine 53 banks directly supervised by it, which are not the subject of the EBA stress test.
Thematic stress tests
In the years when there are no EU-wide EBA stress tests, the ECB carries out stress tests that focus on a specific type of shock on the significant institutions it directly supervises. These tests take place in cooperation with the national supervisory authorities. The ECB publishes the results in an aggregated form.
In 2019, ECB banking supervision tested banks' resilience to idiosyncratic liquidity shocks that were calibrated based on recent crises.
The results of the stress test were mostly positive: banks reported a fairly long survival time based on the available cash and collateral. This would give them ample time to implement their contingency funding plans.
Nevertheless, there is still a need for action on some points, such as the short survival time in the case of foreign currencies, potential ring fencing risks for some banks and the strategies for optimizing the liquidity coverage ratio. In addition, there is still room for improvement in the area of collateral management and the general underestimation of the negative effects of a credit rating downgrade. In the course of the stress test, a number of data quality problems were also identified in the case of supervisory reports. These insights will help improve the quality of supervisory liquidity reports going forward.
The results were included in the assessment of the adequacy of liquidity and risk governance, but had no direct impact on the regulatory capital requirements.
Stress tests as part of comprehensive assessments
Stress tests are one of two parts of the comprehensive assessment. The comprehensive assessment is a review of the financial health of the banks and is intended to ensure that the banks have sufficient capital to withstand potential financial shocks. Comprehensive assessments are carried out in the following cases:
- if a bank is classified as significant and is henceforth directly supervised by the ECB
- if a close cooperation agreement has been concluded between an EU member state outside the euro area and the ECB
- on a case-by-case basis when exceptional circumstances require such an assessment
These stress tests are based on the methodology of the EBA stress tests, but can be adjusted to take into account the individual circumstances of each institution.
EBA stress test methodology
Stress tests for macroprudential purposes
The ECB also carries out stress tests for macroprudential and financial stability purposes. These stress tests usually focus on system-wide effects instead of individual banks and follow a top-down approach, i.e. they do not involve the banks. Their results are regularly published in the Financial Stability Reviews and in the Macroprudential Bulletins.
- November 2019
- Financial Stability Review - 3.2 Evaluating the resilience of the euro area banking sector
- October 29, 2019
- Macroprudential Bulletin - The disciplining effect of supervisory scrutiny on banks ’risk-taking: evidence from the EU ‑ wide stress test
- March 27, 2019
- Macroprudential Bulletin - A bird’s-eye view of the resilience of the European banking system: results from the new macroprudential stress test framework
This page will be continuously updated to reflect the latest developments in relation to the stress tests carried out by the ECB.
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