EBA 2018 EU-Wide Stress Test

From Open Risk Manual

2018 EU-Wide Stress Test

This is the entry point to the annotated documentation of the 2018 EU-Wide Stress Test Methodology [1]. While the exercise applies to a sample of 48 large EU banks, the 2018 Stress Test Methodology is the first globally that incorporates the new accounting standard IFRS 9 and therefore its documentation relevant for any entity applying stress testing in tandem with valuing assets under an Expected Credit Loss approach.

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 EU banks and the EU banking system to shocks, and to challenge the capital position of EU banks. The exercise is based on a common methodology, internally consistent and relevant scenarios, and a set of templates that capture starting point data and stress test results to allow a rigorous assessment of the banks in the sample. The focus is on the assessment of the impact of risk drivers on the solvency of banks. Banks are required to stress test the following common set of risks:

Industry feedback to the draft methodology is available here[2].

The next sections highlight the main features of the Credit Risk and Net Interest Income components of the stress test, with pointers to the more detailed documentation

Credit Risk Section (Summary)

General Remarks

The exercise is be similar to the one conducted in 2016 and will be based on a bottom-up projection from banks subject to constraints and a static balance sheet approach. It does not include a defined pass/fail threshold. Competent Authorities will use the results of the exercise in the Supervisory Review and Evaluation Process (SREP). The methodology is "bottom-up" in the sense that banks are requested to make use of their models but are subject to a number of conservative constraints

The main novelty of the 2018 exercise is the incorporation, for the first time, of the IFRS 9 accounting standards/ Banks starting to report under IFRS 9 in the first quarter of 2018 are requested to forecast credit impairments under the adverse scenario based on the expected credit loss framework of IFRS 9. Therefore, banks are requested to account for credit impairments not only for a 12-month perspective but also based on the lifetime credit losses. Yet due to the immature stage of IFRS 9 models as of early 2018, the methodology dispenses with the scenario averaging required by IFRS 9 provision estimation and uses a single scenario as the basis for the calculation of future provisions.

Broadly speaking banks must translate Macroeconomic Scenarios into corresponding credit risk impacts on

  • The capital available, via impairments and thus the P&L
  • The REA (Risk Weighted Exposure Amount), and thus the capital required, for positions exposed to risks stemming from the default of counterparties.

Main Steps

The estimation of impairments and the translation to available capital requires the use of statistical methods and includes the following main steps:

  1. Estimate starting values of the Risk Parameters
  2. Estimate the impact of the scenarios on risk parameters (typically via a Satellite Model)
  3. Compute impairment flows as the basis for provisions that affect the P&L (and capital)

More detailed documentation on the EBA 2018 Credit Risk Stress Test

Net Interest Income Section (Summary)

Methodology Overview

Broadly speaking banks must translate Macroeconomic Scenarios into NII projections relying on assumptions regarding the pace of the repricing of their portfolio together with projections for risk-free reference rates and margins

More detailed documentation on the EBA 2018 Net Interest Income Stress Test


  1. EBA: 2018 EU-Wide Stress Test - Methodological Note, 31 January 2018
  2. Comments on the 2018 EU-Wide Stress Test draft methodology