February 6, 2020 1:54 pm

EBA tightens bank stress test

Scenarios are based on recession with low and negative interest rates.

The European Banking Authority (EBA) launched this year’s bank stress test at the end of January. As every year, the EBA simulates crisis scenarios to test the resilience of European banks. Following criticism from the European Court of Auditors and EU experts, the test will be significantly tightened in 2020 and will be based for the first time on a recession with low or even negative interest rates for a prolonged period.

The base scenario for this year’s stress test refers to projections published by the national central banks last December. These simulate a cumulative decline in economic output of 4.3 per cent by 2022 and an increase in the unemployment rate of 3.5 percentage points.

The negative scenario is based on the financial stability risks identified by the Systemic Risk Council (ESRB) and a separate EBA risk analysis. The scenario involves a fall in global stock prices of 25 percent in industrialized countries and 40 percent in emerging markets. Falling real estate prices are also assumed.

A total of 51 European banks are participating in the stress test of the European Banking Authority. The results are to be published at the end of July. Financial Times


This post was written by Jens Secker

(Image rights: istockphoto.com/MarkusBeck)

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