The European Banking Authority (EBA) has released the first details about this year’s stress tests, meant to provide regulators and markets with reliable information about how EU banks would weather another crash, but it’s leaving a lot of the legwork to national regulators.
Reliability rests with national supervisory groups
“The assessment of the reliability and robustness of banks’ assumptions, data, estimates and results will rest with the CAs [competent authorities] and for the SSM [single supervisory mechanism] countries centrally with the ECB [European Central Bank],” says the EBA report.
The exact quality control process hasn’t been finalized, and the official methodology and scenarios isn’t expected to be public until April, but this leaves a lot of room for national regulators to interpret measures differently, as the EBA acknowledges.
“Although some differences are expected in the way the macro-economic scenarios will be translated by banks into the relevant risk parameters, the results are expected to be substantially consistent for comparable portfolios, institutions and recent historical trends,” the EBA writes.
Stress tests to represent 50% of each nation’s banking sector
The stress test will include more than 100 banks representing at least 50% of the banking sector in each country, though CAs have the right to include additional banks to the test. “The EBA exercise will be run at the highest level of consolidation,” meaning that a multinational bank will only be tested where the parent bank is located.
The exercise will use consolidated year-end 2013 figures and cover 2014 – 2016. Each bank will be tested for how it would fare under expected market conditions during those years and during adverse circumstances. It will have to maintain an 8% Common Equity Tier 1 ratio under the first scenario and a 5.5% ratio under adverse conditions. While the details of the adverse scenario haven’t been released yet either, it is intended to cover credit risk, market risk, sovereign risk, securitization, and cost of funding.
“CAs may develop additional and specific macro-economic sensitivities and market risk shocks in order to incorporate country specific features as deemed necessary,” says the EBA report, again showing how much leeway national regulators will have under this round of tests. The report adds that “the use of prudential filters for sovereign exposures is under the discretion of the CA.”