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EBA 2018 stress test

EBA 2018 stress test

The European Banking Union has published the detailed methodology – but not yet the macro-economic assumptions – for its 2018 stress test.


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The stress test methodology will be applied to 49 major EEA banks, covering around 70% of the banking sector. The exercise will be based on end-2017 data, and will run from end 2018 to end 2020. 

No “pass or fail” capital thresholds will be applied, although the results will inform supervisory assessments of each bank.


Banks should check that they have the systems and data in place to follow this methodology - in particular the ability to take into account the introduction of IFRS9 from the beginning of 2018.


The detailed methodology defines how banks should calculate the stress impact of common scenarios and sets constraints for their bottom-up calculations. Key points are:

  • The stress test will be conducted on the assumption of static balance sheets.
  • All balance sheet and P&L projections will be based on the accounting conventions applying on 1 January 2018. For banks reporting under IFRS 9 from the first quarter of 2018, the stress test will take the impact of IFRS 9 into account in starting point data and in the projections.
  • The stress test will focus primarily on credit risk, market risk, CCR and CVA, operational risk (including conduct risk) and net interest income (NII).
  • Banks will be required to project the impact of the common scenarios on impairments and thus the P&L, and on risk weighted exposure amounts.
  • The use of internal models will be subject to conservative constraints.
  • Credit risk will be based on the IFRS9 categorisation of exposures - S1 (credit risk has not increased significantly since initial recognition); S2 (credit risk has increased significantly, so the loss allowance should equal lifetime expected credit losses); and S3 (detrimental impact on estimated future cash flows). Stress scenarios will result in a migration of exposures up these categories.
  • Market risk will generally be assessed through a full revaluation after applying a common set of stressed market risk factor shocks consistent with the adverse macroeconomic scenario. FX risk on the banking book and related hedges are excluded, while banks using a trading exemption will be allowed not to apply a full revaluation on items held with a trading intent and their related hedges. For items held with a trading intent, client revenues can be projected for each year (up to a maximum limit of 75% of baseline) if the bank is able to provide historical evidence of the sustainability of these incomes. For CCR, it is assumed that the two most vulnerable of the largest 10 counterparties default. The impact of the scenarios on risk weighted exposures will be based largely on prescribed assumptions.
  • Banks will need to project the P&L impact of losses arising from conduct risk and other operational risks, taking account of historical conduct risk losses reported during the 2013-2017 period.
  • Banks may use their own methodologies and systems to project NII. The split between reference rate and margin components of banks' assets and liabilities distinguishes the risk related to a change in `risk-free' yield curves, and the risk related to a change in the `premium' that the market requires or the bank sets for different types of instruments and counterparties. Assumptions cannot lead to an increase in a bank's NII compared with the 2017 value under the adverse scenario.
  • Banks may also use their own methodologies to project their non-interest income and expenses items.

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