Jay! EBA publishes the 2014 EU-banks stress test methodology
The European Banking Authority (EBA) released today its methodology and macroeconomic scenarios for the 2014 EU-wide stress test. While the extensive process of banks’ balance sheet repair is already underway, the test, designed to assess banks’ resilience to hypothetical external shocks, will identify remaining vulnerabilities in the EU banking sector and will provide a high level of transparency into EU banks’ exposures.
Regarding the definition of capital, this is cryptic: “The impact of the EU wide stress test will be assessed in terms of Common Equity Tier 1. Additional Tier 1 and Tier 2 instruments eligible as regulatory capital under the CRR provisions that convert into Common Equity Tier 1 or are written down upon a trigger event are reported as a separate item if the conversion trigger is above the bank’s Common Equity Tier 1 ratio in the adverse scenario.”
But, this is clearer: “For the purpose of the EU-wide stress test the following hurdle rates are applied as a minimum across all participating banks:
- The capital hurdle rate is set at 8% Common Equity Tier 1 ratio for the baseline scenario.
- The capital hurdle rate is set at 5.5% Common Equity Tier 1 ratio for the adverse scenario.
The relevant CA may calibrate possible supervisory measures based on a ladder of intervention points arising from the stress test and may also more formally set higher hurdle rates and formally commit to take specific actions on the basis of those higher requirements.”
The CET1 threshold of 5.5% is just above the 5.125% regulatory trigger threshold, ie, no trigger may have to be pulled.
Here is the instruction manual: Methodological Note [PDF, 533KB]
See the various Documents, EBA kept updating:
- Press release [PDF, 536KB]
- Adverse macroeconomic scenario [PDF, 737KB]
- EC Projections baseline [PDF, 201KB]
- ESRB Letter – Adverse Scenario [PDF, 163KB]
- Market risk scenarios [PDF, 52KB]
- Securitisation scenario [PDF, 219KB]
- 2014-04-29 Sovereign bond haircuts.pdf [PDF, 102KB]
- FAQs [PDF, 246KB]