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Frequently asked questions on the 2023 stress test

Frankfurt am Main, 31 January 2023

What’s the 2023 EU-wide stress test about? What does it aim to do?

The EU-wide stress test uses 2022 end-of-year data to analyse how a bank’s capital position will develop over the period of the next three years to the end of 2025, under both a baseline and an adverse scenario. The exercise provides supervisors, banks and other market participants with a common analytical framework to compare and assess how resilient EU banks are to country-specific economic shocks.

The ECB will use the stress test results to assess the Pillar 2 capital needs of individual banks in the context of its Supervisory Review and Evaluation Process (SREP). The qualitative outcomes will be included in the risk governance part of the SREP, thereby influencing the determination of Pillar 2 requirements (P2R). The quantitative results will be used as a key input for setting the Pillar 2 Guidance (P2G) and, for the first time, the P2G leverage ratio.

The exercise is designed to strengthen market discipline through the disclosure of consistent and granular information at the individual bank level, illustrating how common shocks affect balance sheets. Supervisory stress-testing does not substitute for banks’ internal stress tests, which they base on scenarios that are tailor-made for their specific risk profiles and vulnerabilities.

How are the samples of euro area banks in the EU-wide stress test and the parallel ECB stress test selected?

The banks taking part in the EU-wide stress test coordinated by the EBA are selected in order to cover roughly 75% of banking assets in the euro area. To be included, banks need to have at least €30 billion in assets. However, banks with specific business models could be excluded if the EU-wide stress test methodology is considered less suitable for assessing their resilience and capital adequacy. In 2023, a total of 57 euro area banks under direct ECB supervision are included in the EBA sample.

For directly supervised banks that are smaller and thus outside the EBA sample, the ECB carries out its own stress test exercise in parallel. In 2023, the number of banks in this stress test is 42.

Some directly supervised banks do not take part in either stress test. This occurs, for example, if they are subsidiaries or branches of non-SSM banks that are participating in the EU-wide exercise. Other reasons for exclusion might be that a bank is currently undergoing restructuring or is taking part in a merger or acquisition.

When will the stress test results be published and what information will be made available?

The stress test results will be published by the end of July 2023.

The European Banking Authority (EBA) will publish granular results for the individual banks participating in the EU-wide exercise.

For the banks participating in the parallel SSM stress test, the ECB will publish aggregate results and selected bank-specific information. The publication approach for this sample will follow the principle of proportionality, as these banks are smaller than those participating in the EU-wide exercise.

What will the ECB do with banks that have a (severe) shortfall in the adverse scenario?

The 2023 stress test is – like in previous years – not a pass-or-fail exercise. Therefore, there is no “shortfall” in the usual sense. Instead, the exercise provides key inputs to the SREP for each bank. In practice, this means that the stress test results (in particular the capital depletion) will be used as a starting point for setting the P2G (as foreseen in the EBA guidelines on SREP and supervisory stress testing).

In line with this approach, banks with (severe) capital depletion in the adverse scenario should generally expect a higher P2G than banks with better results.

Where the severe capital depletion highlights particular risks in certain areas of business, the joint supervisory teams (JSTs) will use this information to follow up with targeted supervisory initiatives and, where appropriate, measures to ensure that those risks are properly managed.

How are stress test results integrated into the SREP?

Stress test results feed into the SREP both qualitatively and quantitatively.

1. Qualitative outcome

  • The stress test offers supervisors many insights into the risks and vulnerabilities of a bank, as well as its risk management capabilities. The JSTs consider different aspects when assessing a bank’s internal governance and risk management in the context of the SREP, which eventually influences how the P2R is calculated. These aspects include, for instance, the timeliness and accuracy of data, as well as the quality of information received. Similarly, quantitative metrics generated directly from IT-based data aim to provide the JSTs with measurable criteria to assess a bank’s performance by applying a scoring system based on four levels. Both the ability of banks to cope with the data requirements and their responsiveness throughout the stress test are measured. In addition, JSTs carry out a qualitative assessment of the banks’ performance during the stress test quality assurance cycles.

2. Quantitative outcome

  • The methodology for setting the P2G follows a two-step approach. In step 1, the bank is placed in a bucket according to the maximum Common Equity Tier 1 depletion during the supervisory stress test. The buckets are designed on the basis of recent supervisory experience, SSM risk tolerance and how severe the stress test is. In step 2, the JSTs apply their expert judgement to adjust the P2G to the idiosyncratic profile of each bank. The JSTs can adjust this within the ranges of the corresponding bucket and, exceptionally, beyond the range of the relevant bucket.
  • In the 2023 SREP, the ECB will, for the first time, apply a new methodology to determine the P2G to address the risk of excessive leverage. This capital guidance seeks to ensure that a bank’s own funds can absorb potential losses resulting from stress scenarios. To set the P2G leverage ratio, the ECB will use the leverage ratio projections in the adverse scenario of the stress test as a starting point and will follow the same two-step process as for the P2G described above.