EBA stress test 2018: the first reactions

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On the second of November 2018, the European Banking Authority (EBA) published the results of the 2018 EU-wide stress test. This test involved 48 banks from 15 EU and EEA countries. Two risk officials give their first reaction to the stress testing results.

Marco Folpmers, Professor of Financial Risk Management at Tilburg University:

Stress testing for banks event | IIR


Although many media reported a comfortable pass, European banks did not “ease past” ECB’s latest stress tests. The stress testing exercise provides insight in not only the solvency position of the 48 participating banks after three years of stress, but also into the impact of the switch from IAS 39 “incurred loss” provisioning to using a forward looking Expected Credit Loss framework. The implementation of IFRS 9 turns out to be significant; the impact of IFRS 9 first implementation on banks’ aggregate common equity tier 1 (CET1) capital ratio being minus 20 bps on fully loaded basis.

Although the results of the stress test are much better than the ones in 2016 and banks have recapitalized, the picture is not all that clear-cut.

Although all 48 banks comply with a CET1 ratio above 5.5%, five banks fall short of the 3% Leverage ratio threshold (fully loaded). These banks are: Norddeutsche Landesbank (Germany), Deutsche Bank (Germany), Banco BPM (Italy), Bayerische Landesbank (Germany) and Barclays (UK).

Collectively, these 5 banks with leverage ratio below 3% in the 2020 stress scenario account for 11% of total risk exposure. Within this group of 5 banks, Barclays and Deutsche Bank are among the largest banks in the sample and both are on the list of global systemically important banks.

Bart Vrancken, Head Enterprise Risk Management at de Volksbank:

Stresstesting voor banken event | IIR


The outcome of the EBA stress test shows that banks’ efforts to build up their capital base have paid off. Their resilience has strengthened as the average capital levels in the adverse scenario have increased by 134bps compared to the 2016 stress test. On the basis of the fully loaded capital requirements, the CET1 reduction across all participating banks is 395 bps. As of end 2020, under the adverse scenario, the banks’ aggregate CET1 capital ratio is 10.1% fully loaded. In essence, this is good news indicating that progress has been made in building a more robust and resilient banking system in Europe.

There are significant variances across banks and across countries where stronger than expected impacts can be noted among the German and UK banks. Contrary to what I expected, Italian banks face less headwind, possibly a result of sufficiently provisioned NPL portfolios. On average, the stress test reveals that European banks are loss making at an average return on equity of -3.1% during the three year span of the test. I expect sustainability of the business model to be a key matter of discussion during the SREP dialogue.

As part of the stress test exercise, 25 banks applied maximum distributable amount (MDA) adjustments following the breach of the MDA trigger (mostly between 7% and 10% for European banks) in any of the three years of the adverse scenario. By using the MDA triggers, banks allow themselves to decrease their capital distributions contributing to a positive impact on capital of 60bps. Let’s see how the supervisors will incorporate this in setting the pillar 2 guidance targets.

The exercise has been time consuming and expensive for the participating banks as well as the supervisors. It is time for both sides to evaluate how the complexity of the stress test methodology can be decomposed or simplified. Looking ahead to the next stress test exercise, banks are encouraged to upgrade their stress test capabilities and to further invest in systems and automatization of processes.