On Wednesday 7 June, the European Banking Authority (EBA) published draft methodology for the stress tests to be applied to European banks in 2018.
For 2018, the exercise will cover 49 European banks, including 35 in the Eurozone that are directly supervised by the ECB in the framework of banking union, or a coverage of 70% of the EU banking sector. For the Eurozone, this will involve nine German, five Spanish, six French, four Italian, four Dutch, two Irish, two Austrian, two Belgian and one Finnish bank.
The stress tests will aim to assess how they behave on the basis of two scenarios, a basic scenario and a crisis situation, for three years and on the basis of figures available at the end of 2017.
As in 2016, the banks will be tested on their ability to withstand a series of risks, in both scenarios, which may have an effect on their solvency, namely operational, credit (including securitisation) and counterpart risks.
For the first time, the proposed methodology includes the IFRS 9 standard, which aims to improve financial information on financial instruments, taking account of concerns that have arisen in this field during the financial crisis, such as the accountancy treatment of anticipated losses on financial assets. The exercise will take account of the impact of its implementation from 1 January 2018, in terms both of the starting point and projections.
For the financial year 2018, and as was the case in 2016, no single capital threshold has been defined, as the banks will be assessed in light of the regulatory own-fund ratios identified on the so-called 'static' balance sheet.
The “draft methodology can be seen as a continuation of the 2016 approach, with the adjustments identified after the IFRS 9 implementation and 2016 lessons learnt”, the authority states in a press release.
The publication of this draft methodology is the start of informal discussions with banks, to be fed into the finalisation of the document. The final methodology will be published when the exercise is launched in early 2018 and the results are expected by the middle of the year. (Original version in French by Marion Fontana)