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EBA sets out details of stress test that banks cannot fail

The European Banking Authority (EBA) has issued details of the methodology it will use for EU bank stress tests in 2016, with no minimum capital hurdle. 06 Nov 2015

Stress tests are designed to measure banks' financial resistance to adverse conditions. In the latest round of checks, which will be launched in February next year, 53 banks will be assessed. 39 of which fall under the jurisdiction of the Single Supervisory Mechanism.

However, the proposed methodology from the EBA will mean that banks are not judged against a single capital threshold as they have been in the past and therefore cannot "fail" the test, said Michael Ruck, a banking expert with Pinsent Masons, the law firm behind

"The purpose of stress testing must surely include the potential for it to be failed. However, tests can be unlikely to be failed if they seek to test other key matters which are considered to be more widely systemic or important," Ruck said.

"The EU stress testing will need careful implementation as, if anyone fails a test which is supposedly impossible to fail, that will cause significant and extensive concern," he said.

In 2014 banks had to maintain a ratio of capital to risk-weighted assets of 8%, or down to 5.5% in an adverse scenario.

"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, and to challenge the capital position of EU banks," the EBA said.

"The exercise is based on a common methodology, internally consistent and relevant scenarios, and a set of templates to capture starting point data and stress test results to allow a rigorous assessment of the banks in the sample," it said.

The EBA announced in March that it would not run a stress test in 2015, but would instead run a 'transparency exercise' to gather data on banks' balance sheets and portfolios.