EBA stress test finds banks’ resilience to shocks has strengthened

The tests measure banks’ financial resistance to adverse situations. For the first time the EBA assessed the impact of the new International Financial Reporting Standard (IFRS 9), finding that the negative impact of its implementation on banks' aggregate common equity tier 1 (CET1) capital ratio was -20 basis points (bps) on a fully loaded basis and -10 bps on a transitional basis.

IFRS 9 was issued by the London-based International Accounting Standards Board and requires firms to account for expected credit losses at the point that they first recognise financial instruments, and to recognise full lifetime expected losses at an earlier stage.

The 2018 stress test (60 page / 200KB PDF) assessed 33 eurozone-area banks and 15 banks from countries outside the eurozone. The EBA noted that the aggregate capital ratio at the starting point of the 2018 test was “notably” above the ratios of previous tests.

On average, banks had a fully loaded CET1 ratio of 14% in 2017 once the impact of IFRS 9 had been applied. Under the adverse scenarios, the ratio fell to 10.1% by 2020.

The stress test impact was driven by hypothetical credit risk losses, aggregate market losses and operational risk losses.

Italy’s Banco BPM and the UK’s Lloyds Banking Group and Barclays had the lowest fully loaded CET1 ratios under the adverse scenario, all under 7%.

As in the previous exercise in 2016, the stress test does not include a defined pass/fail threshold. The results of the stress test will assist authorities in assessing banks' ability to meet applicable prudential requirements under the stress scenario and “form a solid ground for discussion between the supervisor and the individual banks”, according to the EBA.