Mon. Jul 15th, 2024

31 January 2023

  • The exercise assesses the performance of banks under a baseline and adverse scenario during the period 2023-25.
  • The adverse scenario assumes a hypothetical worsening of geopolitical tensions leading to a severe decline in GDP with persistent inflation and high interest rates. The adverse scenario is designed to ensure a significant severity of various macro-economic and financial shocks across all EU countries and, for the first time, depicts a breakdown of the shocks (on real gross value added) by economic sectors.
  • The EU-wide stress test will be conducted on a much larger sample compared to previous years, covering 70 EU banks and 75% of total banking assets in the EU.

The European Banking Authority (EBA) launched today the 2023 EU-wide stress test and released the macroeconomic scenarios. This year’s EU-wide stress test is designed to provide valuable input for assessing the resilience of the European banking sector in the current uncertain and changing macroeconomic environment. The adverse scenario is based on a narrative of hypothetical heightened geopolitical tensions, with high inflation and higher interest rates having strong adverse effects on private consumption and investments, both domestically and globally. In terms of GDP decline, the 2023 adverse scenario is the most severe used in the EU wide stress up to now. The severe nature of the adverse scenario reflects a deliberate choice and reflects the purpose of the stress test exercise, which is to assess the resilience of the European banking system to a hypothetical severely deteriorated macro-environment. The EBA expects to publish the results of the exercise at the end of July 2023.

Objectives and the scope of the stress test

The stress test assesses the solvency of EU banks in a hypothetical adverse macroeconomic scenario over a three-year horizon (2023-25). The objectives of the stress test are to:

  • assess and compare the overall resilience of EU banks to relevant severe economic shocks.
  • assess if bank capital levels are sufficient to ensure banks can support the economy in periods of stress.
  • foster market discipline through transparent publication of consistent, granular and comparable data at a bank-by-bank level.
  • provide input to the Supervisory Review and Evaluation Process (SREP) for competent supervisory authorities.

The EU-wide stress test will be conducted on a sample of 70 EU banks – thereof 57 from countries which are members of the Single Supervisory Mechanism (SSM) – covering roughly 75% of total banking sector assets in the EU and Norway. Compared to previous EU-wide stress tests, the 2023 exercise covers an additional 20 banks.

Key elements of the scenarios

The narrative depicts an adverse scenario related to a hypothetical severe worsening of geopolitical developments, accompanied by an increase in commodity prices and resurgence of COVID-19 contagion. This results in high inflation and adverse effects on private consumption and investment coupled with a worldwide economic contraction. The worsening of economic prospects is reflected in a substantial global increase of long-term interest rates, a sustained drop in GDP and increased unemployment.

The adverse scenario, although unlikely to unfold, is used to assess the resilience of banks to a hypothetical severe scenario of a significant deterioration in the overall outlook for the economy and financial markets in the next three years. It is also designed to ensure a significant level of severity across all EU countries. It assumes more severe shocks for several macro-financial variables than in previous stress tests. In the adverse scenario real GDP at the EU level declines by 6% cumulatively over the three-year horizon, while the unemployment rate increases by 6.1 percentage points, both relative to the starting point. Inflation will be well above baseline over the whole scenario horizon, by 3 ppts in 2023 and 1.5 ppts in 2025.

This year’s scenario includes for the first-time information on the growth of Gross Value Added (GVA) in 16 sectors of economic activity. Such decomposition will help better assess banks’ performance depending on their business model and sectoral exposures.

Notes for editors
  • The EBA’s 2023 stress test methodology to be applied to the scenarios released today can be found on the EBA website.
  • The full sample[1] of 70 EU banks participating in this year exercise can be found in Annex 1 of the EBA methodology.
  • The exercise will be run at the highest level of consolidation. The scope of consolidation is the perimeter of the banking group as defined by the CRR/CRD. This exercise will involve close cooperation between the EBA and the competent authorities (including the SSM, the ECB and the ESRB).
  • The convention used in the calibration of the adverse scenario is one of “no policy change”. This means that no other monetary policy and fiscal policy reactions other than the ones considered under the baseline scenario are assumed under the adverse scenario.
  • The baseline scenario for EU countries is based on the projections from the national central banks of December 2022. The adverse scenario assumes the materialisation of the main financial stability risks that have been identified by the European Systemic Risk Board (ESRB).
  • Detailed information about the adverse scenario can be found in the note produced by the European Systemic Risk Board (ESRB).
 [1] In the package that was published today, the sample has been revised. The following six banks were excluded from the sample (country code of the bank in brackets): Banco de Crédito Social Cooperativo, S.A (ES), Bank of America Europe Designated Activity Company (IE), BAWAG Group AG (AT), Credito Emiliano Holding S.p.A. (IT), Deutsche Pfandbriefbank AG (DE) and Erwerbsgesellschaft der S-Finanzgruppe mbH & Co. KG (DE). These banks were provisionally included in the sample for the 2023 EU-wide stress test to offset possible exclusions of banks before the launch of the exercise. Since no changes to the sample materialised by 15 December 2022, the banks were excluded from the sample.
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