The European Banking Authority (EBA) has published the methodology and macroeconomic scenarios for the 2016 EU-wide stress test.
The stress test is designed to provide supervisors, banks and other market participants with a common analytical framework to compare consistently and assess the resilience of EU banks to economic shocks.
In particular, the key features of the test include:
- the common methodology which assesses solvency and covers all main risk types including: (i) credit risk and securitisation; (ii) market risk; (iii) sovereign risk; (iv) funding risk and operational; and (v) conduct risk; and
- the adverse scenario which reflects the four systemic risks that are currently assessed as representing the most material threats to the stability of the EU banking sector: (i) an abrupt reversal of compressed global risk premia, amplified by low secondary market liquidity; ii) weak profitability prospects for banks and insurers in a low nominal growth environment, amid incomplete balance sheet adjustments; iii) rising of debt sustainability concerns in the public and non-financial private sectors, amid low nominal growth; and iv) prospective stress in a rapidly growing shadow banking sector, amplified by spillover and liquidity risk.
The EBA expects to publish the results of the stress test in early Q3 2016.
View EBA launches 2016 EU wide stress test exercise, 24 February 2016