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What is the purpose of the 2025 EU-wide stress test? What does it intend to accomplish?
The EU-wide stress test employs 2024 year-end data to evaluate how a bank’s capital position may evolve over the three years leading to the end of 2027, across both a baseline and a challenging scenario. This exercise furnishes supervisors, banks, and other market players with a shared analytical framework for comparing and evaluating the resilience of EU banks against country-specific economic shocks.
The ECB will leverage the results from the stress test to determine the Pillar 2 capital requirements of individual banks as part of the Supervisory Review and Evaluation Process (SREP). Qualitative outcomes will contribute to the risk governance section of the SREP, potentially impacting the establishment of Pillar 2 requirements (P2R). The quantitative findings will serve as a critical input for defining the Pillar 2 guidance (P2G) and the leverage ratio P2G.
This exercise aims to enhance market discipline by providing consistent and detailed information at an individual bank level, demonstrating how common shocks influence bank balance sheets. Supervisory stress testing is not meant to replace internal stress tests conducted by banks, which are tailored to their specific risk profiles and weaknesses.
The goals of the exercise include evaluating banks’ resilience to adverse market conditions using a uniform stress test methodology, contributing to the overall SREP to ensure adequate capital and liquidity for institutions, promoting banks’ own stress test and risk management capabilities, and improving transparency through extended disclosures.
How are euro area banks chosen for the EU-wide stress test and the ECB parallel stress test?
The euro area banks participating in the EU-wide stress test, coordinated by the European Banking Authority (EBA), are selected to represent approximately 75% of banking assets within the euro area. For inclusion, banks must possess assets totaling at least €30 billion. However, banks with unique business models may be excluded if the EU-wide stress test methodology is deemed unsuitable for assessing their resilience and capital adequacy. In 2025, the EBA’s sample comprises 51 euro area banks under direct supervision by the ECB.
For smaller banks that are directly supervised but not included in the EBA sample, the ECB conducts its own stress test exercise concurrently. In 2025, 45 banks will participate in this parallel test.
Some directly supervised banks may not participate in either stress test. This could be the case if they are subsidiaries or branches of foreign banks outside the Single Supervisory Mechanism (SSM) involved in the EU-wide exercise. Other exclusion factors might include ongoing restructuring or participation in a merger or acquisition.
When will the ECB disclose the results, and what information will be released?
The stress test results are scheduled for publication in early August 2025.
The EBA will release detailed results for the individual banks in the EU-wide exercise.
For banks involved in the parallel ECB stress test, the ECB will publish aggregate results along with select bank-specific data. Given that these banks are smaller than those in the EU-wide exercise, the quantity of information shared for this group will be proportional to the banks’ sizes.
What actions will the ECB take for banks that show a (severe) shortfall in the adverse scenario?
If severe capital depletion indicates specific risks in certain business areas, the Joint Supervisory Teams (JSTs) will utilize this information to implement targeted supervisory initiatives and, where necessary, measures to manage these risks appropriately.
How are the stress test results incorporated into the SREP?
Stress test results are integrated into the SREP both qualitatively and quantitatively.
The stress test offers insights into a bank’s vulnerabilities and its capability to manage risks. When evaluating a bank’s governance and risk management within the context of the SREP, the JSTs consider various factors, which ultimately influences the calculation of the P2R. These factors encompass data quality, the timeliness and accuracy of data, as well as the caliber of the information received. Likewise, quantitative indicators derived from IT-based data are utilized to present the JSTs with measurable criteria for assessing a bank’s performance regarding data quality through a four-level scoring system. Both the banks’ capacity to meet data requirements and their responsiveness throughout the stress test are evaluated. Additionally, JSTs perform a qualitative review of the banks’ performance during the quality assurance cycles of the stress test.
The methodology for determining the P2G is based on a two-step process. In the first step, the bank is categorized according to its maximum Common Equity Tier 1 (CET1) depletion resulting from the supervisory stress test. These categories are formulated based on recent supervisory practices, the SSM risk tolerance framework, and the severity of the stress test. During the second step, the JSTs apply their expert judgment to adjust the P2G according to each bank’s unique profile. The JSTs may modify this within the bounds of the respective category and, in exceptional circumstances, beyond the category’s limits.
For the 2025 SREP, the ECB will also apply this methodology in determining the P2G to mitigate the risk of excessive leverage. This capital guidance aims to ensure that a bank’s own funds can absorb potential losses arising from stress scenarios. To establish the leverage ratio P2G, the ECB will utilize the leverage ratio projections from the adverse scenario of the stress test as a starting point and will follow the same two-step method outlined above for the P2G.
What actions will the ECB take concerning banks that provide overly optimistic projections?
Historically, the ECB has identified that certain banks submit projections that are excessively optimistic, failing to fully account for the implications of the stress test scenario and methodology based on the particular risk profiles of those banks. To address this issue, the ECB will introduce a series of measures aimed at discouraging insufficiently prudent projections. These measures will be mutually reinforcing, forming an escalation framework where more rigorous actions are introduced only if previous measures fall short.
As part of these measures,banks that exhibit this kind of conduct will encounter increased examination during the quality assurance phase, potentially entailing on-site evaluations. Drawing from observations obtained during these assessments and the overall results of the quality assurance, certain banks may be subjected to in-person inspections following the completion of the stress test to pinpoint structural deficiencies within their stress testing frameworks and to encourage enhancements in their stress testing proficiencies. As a final measure, banks that consistently fail to rectify problems in the stress testing framework may ultimately face additional actions as part of an escalation process in future exercises.
Why will the ECB carry out a scenario analysis of counterparty credit risk in addition to the EU-wide and ECB stress assessments?
The counterparty credit risk (CCR) evaluation is not included in the EU-wide stress test but will be conducted largely in conjunction with it. It represents a detailed examination of banks’ CCR exposures to non-bank financial intermediaries (NBFIs) and aims to address certain shortcomings in stress test practices recognized by the ECB during targeted CCR evaluations.
The endeavor will enhance our comprehension of how supervised banks model CCR under various stress scenarios and the vulnerabilities they face due to interconnections with NBFIs.
Mitigating deficiencies in credit risk and CCR management frameworks is part of the SSM supervisory priorities for 2024-26 and 2025-2027.
While the EBA methodology addresses some components of CCR exposures, the ECB’s analysis will encompass additional significant features, such as a focus on the largest non-bank financial counterparties, the introduction of multi-scenario analysis, and an emphasis on liquidity to complement the solvency focus.
What criteria is used to select euro area banks participating in the supplementary CCR analysis?
The banks chosen to engage in the supplementary CCR analysis are:
- global systemically important banks (GSIBs);
- banks with substantial exposures to NBFI counterparties;
- banks with notable CET1 depletion due to CCR in the 2023 EU-wide stress test;
- ad hoc inclusions based on the supervisory knowledge of JSTs.
The identities of the banks involved in the CCR analysis will remain undisclosed.
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