EU Cooks Up a Stress Test for 2016 That No Bank Will Fail

Updated on
  • Concern about EU banks' ability to withstand shock lingers
  • Tests feed into SREP, won't have a headline pass/fail ratio

Fifty-three European Union banks will undergo a stress test with a difference next year: none of them will fail.

The European Banking Authority said on Thursday that its 2016 stress test won’t judge banks against a single capital threshold as in previous exercises. The results are intended to be used by EU supervisors in their annual review of banks’ resilience, “under which decisions are made on appropriate capital resources and forward-looking capital plans are challenged,” the EBA said in a statement.

In 2014, to pass a baseline scenario, banks had to maintain a ratio of capital to risk-weighted assets of 8 percent. In the adverse scenario, which allowed lenders to run down capital buffers, the ratio was 5.5 percent. Twenty-four banks failed that test with a capital shortfall of 24.6 billion euros ($26.7 billion). The 2016 assessment is based on a static balance sheet as of the end of this year.

“The objective of the EU-wide stress test is to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of the EU banking system to shocks,” the EBA said.

Banking Assets

Concern about the ability of Europe’s banking system to withstand shocks still lingers, though increased levels of capital and sharper supervisory scrutiny as the European Central Bank enters its second year overseeing the industry have helped dissipate some of the anxiety.

The EBA sample covers about 70 percent of national banking-industry assets in the euro area, each EU member state and Norway. To be included, banks must have at least 30 billion euros of assets, the EBA said in its draft. National authorities can ask for additional firms to be included provided they have at least 100 billion euros of assets.

The largest national contingent comes from Germany, which has 10 lenders in the test including Deutsche Bank AG, Commerzbank AG and Volkswagen Financial Services AG. France and Spain each have six banks in the exercise, including BNP Paribas SA, Societe Generale SA and Banco Santander SA, while UniCredit SpA and four other Italian banks will also take part.

In the U.K. the four largest high street lenders led by HSBC Holdings Plc and Barclays Plc will take part, as will four each of Dutch and Swedish lenders.

Adverse Scenario

The adverse scenario for next year’s test will be developed by the European Systemic Risk Board and the ECB. The European Commission, the EU’s executive arm, will provide the macroeconomic baseline scenario. The scenarios, final methodology and reporting templates will be published in late February.

The outcomes, including banks’ individual results, will be published at the beginning of the third quarter of 2016, to allow them to be used by supervisors as they wrap up the annual supervisory review and evaluation process, or SREP, the EBA said.