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Key Features of 2014 EU Bank Stress Tests

The European Banking Authority (EBA) has announced key components of the forthcoming 2014 EU stress test that will be conducted on a sample of 124 EU banks covering at least 50% of the national banking sector in each EU Member State.  According to the EBA, the EU stress test aims at ensuring consistency and comparability of the outcomes across all sample banks based on common methodologies, scenarios and disclosures.

Key Features of the 2014 EU Bank Stress Test:  According to the EBA, the 2014 EU stress test will include the following key features:

Capital Thresholds:  A Common Equity Tier 1 (CET1) risk-based capital ratio of 8% will be the capital hurdle rate for the baseline scenario and a CET1 risk-based capital ratio of 5.5% will be the capital hurdle rate for the adverse scenario.  CET1 is as defined in CRD IV subject to transitional arrangements.

  • The relevant competent authority (CA) may set higher hurdle rates and formally commit to take specific actions on the basis of those higher requirements.  The relevant CA may also assess the impact of the stress test against other yardsticks, including fully loaded CET1 under CRD IV.

Regulators Involved: 

  • The EBA will be responsible for developing and providing CAs with a consistent and comparable methodology to allow them to undertake a rigorous assessment of banks’ resilience under stress.  The EBA will also provide CAs with EU benchmarks on risk parameters for the purposes of consistency checks.
  • The European Systemic Risk Board (ESRB) will provide a common scenario for conducting the stress test.
  • CAs will be responsible for ensuring that banks correctly apply the common methodology developed by the EBA.  In particular, CAs will be responsible for assessing the reliability and robustness of banks’ assumptions, data, estimates and results.

Risks Covered:  Banks will be required to stress a common set of risks including credit risk, market risk, sovereign risk, securitization and cost of funding.  Both trading and banking book assets will be subject to stress, as well as off-balance sheet exposures.

  • The EBA stated that although the focus of the stress test is on credit and market risks, banks are requested to assess the impact on interest income, including the increase in the cost of funding, over the time horizon.  In addition, capital requirements for operational risk are also taken into account in the stress test using a simplified approach.
  • CAs may include additional risks and country-specific sensitivities.

Treatment of Sovereign Debt Securities:  According to the EBA, the stress scenarios will affect the price of all sovereign debt securities. 

  • Securities held in the trading book will be marked to market with any losses realized immediately.
  • Securities held as hold to maturity will experience changes in risk weights based on internal model assessments of changes in credit risk.
  • Securities held as available for sale will also be marked to market, but the capital treatment will depend on choices made by the relevant supervisors.  Under CRD IV, CAs have the discretion to filter out unrealized losses arising from certain available for sale securities.  The supervisory choices will be disclosed in the stress test results.

Time Horizon:  The time horizon for the 2014 EU stress test will be a period of three years from 2014 to 2016.

Static Balance Sheet Assumption:  The stress test will be conducted under the assumption of a static balance sheet, which implies no new growth and constant business mix and model throughout the three-year time horizon.  Assets and liabilities that mature within the three-year time horizon should be replaced with similar financial instruments. No workout of defaulted assets will assumed in the stress test.

  • While the EU stress test is based on a static balance sheet assumption, CAs may analyze banks’ response functions and managerial actions for mitigating the impact of the stress test as well as variables such as the evolution of credit growth under the scenarios as part of the process for identifying possible supervisory measures for addressing any capital shortfalls.
  • Exemptions from the static balance sheet assumption may be granted due to the likely completion of mandatory restructuring plans that have been publicly announced before December 31, 2013.

Publication of Methodology and Stress Test Scenarios:  The methodology and stress test scenarios are expected to be published in April 2014.

Disclosure of Stress Test Results:  The EBA stated that it expects to disclose stress test results on a bank-by-bank basis in October 2014.  The level of granularity of the data disclosed will be consistent with that of the 2011 EU stress test and 2013 EU-wide transparency exercise.  The disclosure will include, among other things, capital positions, risk exposures and sovereign holdings.



EBA, Main features of the 2014 EU-wide stress test (Jan. 31, 2014) available here:

EBA, 2014 EU-wide stress test: list of sample banks (Jan. 31, 2014) available here:

EBA, 2014 EU-wide stress test: Frequently Asked Questions (Jan. 31, 2014) available here:

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