On Wednesday 31 January, the European Banking Authority (EBA) kicked off its banking stress tests to be applied in 2018 to 48 European banks, or 70% of the EU banking sector. The results are expected by 2 November 2018 (see EUROPE 11895).
The EBA unveiled its final methodology at the end of November (see EUROPE 11804). The main change from the previous exercise is that it now includes the impact of the implementation of the international financial reporting standard IFRS 9.
Compared to the base scenario, the crisis scenario in which the banks are to be tested involves a GDP growth rate of -1.2% in 2018, -2.2% in 2019 and +0.7% in 2020. Overall, it involves a deviation in GDP of 8.3% in 2020 compared to its base level, which equates to the most serious scenario so far in terms of GDP, compared to the 2014 and 2016 exercises, the authority explains in a press release.
It also includes an increase in unemployment, a drop in the harmonised consumer price index and a drop in residential real estate prices up to 2020.
The crisis scenario, which was put together by the European Systemic Risk Board, is based on four systemic risks, identified as the threats that are currently the greatest to the stability of the EU banking sector, namely: - an abrupt and sizeable repricing of risk premia in global financial markets, which would spill over to the European countries and lead to a tightening of financial conditions; - adverse feedback loop between weak bank profitability and low nominal growth, resulting from the decline in economic activity in the EU; - liquidity risks in the non-bank financial sector with potential spill over to the broader financial system; - all of the above, amplified by growing concerns for the viability of public and private debt sustainability in a context of increased political uncertainty.
The EBA explains that this scenario was designed to ensure an adequate level of severity across all EU countries and that it also includes a large range of macroeconomic risks that may be associated with Brexit. (Original version in French by Marion Fontana)