European Banking Supervision uses stress tests to assess how well banks are able to cope with financial and economic shocks. Stress test results help supervisors identify banks’ vulnerabilities and address them early on in the supervisory dialogue with banks.
The ECB conducts several types of stress test:
In addition to these, specific stress tests can also be conducted on individual banks or groups of banks if necessary.
EU law requires the ECB to carry out stress tests on supervised banks at least once per year. The results of annual stress tests provide important input to the SREP process for the test year.
Every two years the EBA carries out EU-wide stress tests in cooperation with the ECB, the European Systemic Risk Board (ESRB) and the national supervisory authorities. The sample included in the test covers the largest significant banks supervised directly by the ECB. The exercise uses the EBA’s methodology and templates, and the scenarios and key assumptions are developed jointly between the EBA, the ESRB, the ECB and the European Commission. Both aggregate and individual results are published by the EBA.
In years when the EBA conducts its EU-wide stress test, the ECB conducts its own stress test for those banks under its direct supervision that are not part of the EU-wide EBA stress test. This test is part of the annual SREP process. The test uses EBA methodology, with necessary adjustments for smaller banks to allow for a proportionate treatment. The results are then published by the ECB.
As part of the 2021 EU-wide stress test coordinated by the EBA, which replaced the 2020 exercise postponed by one year because of the coronavirus pandemic, the ECB examined 38 significant euro area banks. These banks represented around 70% of total euro area banking assets. The EBA published the results for the individual banks at the end of July 2021. In parallel, the ECB conducted its own stress test for 51 banks it supervises directly but that were not included in the EBA-led stress test sample. Furthermore, this was the first time the ECB published more individual data on ECB-supervised supervised banks not part of the EBA sample.
In years when there is no EU-wide EBA stress test the ECB tests significant institutions under its direct supervision against a specific kind of shock. These tests are run in cooperation with national supervisory authorities. The ECB has published the results on an aggregate basis.
In 2019 ECB Banking Supervision tested banks’ resilience to idiosyncratic liquidity shocks, which were calibrated based on recent crisis episodes.
The results of the exercise were broadly positive: banks reported rather long survival periods with available cash and collateral, which would leave them significant time to deploy their contingency funding plans.
However, a number of issues deserve further attention: short survival periods in foreign currencies; potential ring-fencing risks for some banks; strategies to optimise liquidity coverage ratios (LCR); room for improvement in collateral management practices and a general underestimation of the adverse impact of a rating downgrade. The exercise also uncovered some data quality issues in regulatory reporting. These findings will help to improve the quality of supervisory reporting on liquidity going forward.
The results informed the assessment of banks’ liquidity adequacy and risk governance, but they did not directly affect supervisory capital requirements.
Stress tests are one of the two pillars of the comprehensive assessment, which is a financial health check that helps to ensure banks have enough capital to withstand possible financial shocks. Comprehensive assessments are carried out either
These stress tests are based on the EBA stress test methodology, but they can be adapted to take into account institutions’ individual circumstances.
The ECB also conducts stress tests for macroprudential and financial stability purposes. They tend to focus on system-wide effects rather than on individual banks and are run in a top-down manner (without the involvement of the banks). The results are regularly published in Financial Stability Reviews and Macroprudential Bulletins.
This page will be updated on an ongoing basis to reflect the latest developments relating to the stress test exercises conducted by the ECB.