STRESS TEST (ST)

Abstract

Together with Asset Quality Review (AQR) by the ECB, the Stress Tests (ST) scenarios will be defined. The two analyses are preliminary tools to building an integrated banking system (European Banking Union), with common rules for all European banks and supervision which will be assigned to the ECB through a single supervisory mechanism (SSM).

The European Banking Authority (EBA) assessing the strength of the European Banking System

The Stress Test will be performed by the European Banking Authority (EBA) to assess the banks’ soundness  in case of crisis (as shown in Table 2) to estimate the need for additional capital. In particular, these tests will be performed by the EBA in conjunction with the national supervisory authorities of the Member States, with the European Systemic Risk Board (ESRB), the ECB and the European Commission.

Tab. 2: Stress Test (ST)

 

In 2011 Europe had started the risks assessment through the national supervisory authorities to proceed in a rapid reinforcement of capital. If because of the AQR and Stress Test liquidity shortage emerges, banks should increase their capital. In particular, the minimum capital required for banks in the event of adverse scenario to overcome the stress test is equivalent to a Common Equity Tier 1 of 5.5%, while the baseline scenario has a level of 8%.

The resilience of EU banks will be assessed over a period of three years (2014-2016), but the results of these stress tests will be available in October 2014.

Specifically, the stress scenarios include a number of risk factors that will influence the economic and financial indicators:

- Collapse of the global financial markets

- Collapse of domestic and foreign demand in EU countries;

- Devaluation of the currency in Eastern Europe countries;

- Collapse of property prices;

- Shock on bonds (banking, corporate and sovereign), with a corresponding interest rates increase;

- Stalemate on political and economic reforms and an interest rates increase in the short term of the EU Member.

 

References

BANCA D’ITALIA (2014) La recente analisi dei prestiti deteriorati condotta dalla Banca d’Italia: principali caratteristiche e risultati, Banca d’Italia (http://www.ilsole24ore.com/pdf2010/SoleOnLine5/_Oggetti_Correlati/Documenti/Finanza%20e%20Mercati/2013/07/Nota-Provisioni.pdf?uuid=1cf49f18-f87d-11e2-b0d2-9290ada7c4f9)

EUROPEAN CENTRAL BANK (2014) Asset Quality Review Phase 2 Manual, ECB, March (http://www.ecb.europa.eu/pub/pdf/other/assetqualityreviewphase2manual201403en.pdf?e8cc41ce0e4ee40222cbe148574e4af7)

EUROPEAN CENTRAL BANK (2013) La BCE da inizio alla valutazione approfondita in vista dell’assunzione delle funzioni di vigilanza, Comunicato stampa BCE, 23 Ottobre (http://www.bancaditalia.it/media/comunicati_bce/com_bce/2013/pr-20131023/PR_2013-10-23-comprehensive-assessment_it.pdf)

HENRY J. – KOK C. (2013) A macro stress testing framework for assessing systemic risks in the banking sector, ECB Occasional paper series no 152 / October (http://www.ecb.europa.eu/pub/pdf/scpops/ecbocp152.pdf)

OTTOLINI R. – UBALDI E. (2014) Liquidity Stress Test: da utili a necessari, FinRiskAlert.it (https://www.finriskalert.it/wp-content/pdf/Newsletter-5-2014.pdf)

QUAGLIARIELLO M. (2013) Dall’analisi della qualità degli attivi allo stress test europeo, Contributi Bancaria n.9 (http://www.bancaria.it/assets/PDF/2013-09.pdf)

 

Editor: Giovanni AVERSA