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2018 EBA stress test

2018 EBA stress test

The EBA has published further details of its 2018 stress test, including the baseline and adverse scenarios.

Ian Nelson

Head of Banking & Capital Markets

KPMG in Ireland


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The stress tests will be run for 48 EEA banks, with the ECB conducting stress tests for 37 directly supervised banks using the EBA's methodology, templates and scenarios. Individual bank results will be published on 2 November 2018. There is no “pass/fail” test, but the results will feed into the Supervisory Review and Evaluation Process, including the setting of Pillar 2 Guidance for individual banks.

The baseline scenario is for steady growth in real GDP of 1.5 - 2.0 percent in most EEA countries from 2018 to 2020. The adverse scenario is for negative real GDP growth, in particular in 2018 and 2019, bringing real GDP to 8.3 percent below its baseline level (on average across the EU) by the end of 2020. This is a more severe adverse scenario than used in previous EBA stress tests. The adverse scenario also includes country-specific higher short- and long-term interest rates; sharp declines in real estate and equity prices; higher unemployment; lower inflation; and prescribed shocks to credit risk losses for sovereign exposures.

Other key elements of the 2018 stress test are:

  • IFRS 9 accounting - for banks commencing IFRS 9 reporting in the first quarter of 2018, the starting point data will take into account the impact of the introduction of IFRS 9, while all balance sheet and P&L projections for 2018 - 2020 will be based on IFRS 9. Banks will need to be able to account for credit impairments not only for a 12-month perspective, but also for lifetime credit losses. 
  • Static balance sheets - Assets and liabilities that mature within the time horizon of the exercise should be replaced with similar financial instruments in terms of type, currency, credit quality and original maturity. No workouts or cure of Stage 3 assets are permitted during the exercise, and no account can be taken of capital measures taken after end-2017. 
  • Net interest income - banks cannot increase their NII above its 2017 value, or reduce their annual administrative and other operating expenses. 
  • Conduct and operational risk - projections of losses that may arise from new conduct risk events and from other operational risks are subject to a minimum floor, computed in the baseline scenario as the average of the historical losses reported by the bank during the 2013-2017 period for non-material events only. This floor is more conservative under the adverse scenario and requires banks to apply a stress multiplier to the average. 
  • Market risk - the impact of market risk is to be assessed through a full revaluation of all positions after applying a common set of stressed market risk factor shocks consistent with the adverse scenario. The impact of FX risk on the banking book and related hedges is excluded, while under the trading exemption banks are allowed to apply related hedges to items held with a trading intent.

KPMG Ireland has significant experience gained from supporting many clients in previous regulatory stress tests, and in preparatory engagements for the 2018 stress test exercise; and through a suite of tools including a template validation checker, credit risk, IFRS 9 application (which requires a greater demand on forecasting methodologies and data quality), and a top-down fast analysis tool.

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