By Leonidas Stergiou
With a new “hybrid model” the endurance of large and important European banks will be tested in 2023, including all four Greek systemic banks.
The exercise will be conducted under an adverse scenario to be announced at the end of the year, along with the final details of the new methodology.
The new stress tests will start in January and the results will be made public in July 2023.
Two-phase test
According to the general outline just published by the European Banking Authority (EBA), the 2023 stress tests will be carried out in two phases:
The first will include the assessment of the banks based on the data they provide (top-down) and will take into account the sectors where other risks related to the generation of net income from fees and commissions will be exposed.
That is, their operating model, their exposure to other non-financial or investment businesses, to sectors with higher risks or greater sensitivity to interest rates, such as real estate, etc., will be taken into account.
The second will start from risk parameters per bank based on the adverse scenarios (bottom-up). This approach is the one followed until the last stress tests carried out in 2021.
The aim of this change is to incorporate risks created by the pandemic and the long period of low and negative interest rates, which may have also affected the banks’ operating model.
For example, the risks associated with red loan arrangements and the possibility that provisions have been understated will be considered. In addition, due to low interest rates, banks have not been able to increase interest income (income from loans), so they seek higher returns with higher risk by placing in the markets.
At the same time, risks from exposure to sectors, such as real estate or investment funds, etc., will be taken into account separately. These risks, which may not have been taken into account or have been underestimated by the banks, will increase the needs for the funds of the so-called Pillar 2. These funds do not belong to the supervisory.
Revenue from commissions
The new methodology covers all risk areas and is based on that developed for the EU’s broad stress test. of 2021. Some aspects of the methodology have been improved based on the lessons learned from the 2021 exercise. A new feature is, for example, the forecasts of net fee and commission income (NFCI).
This is the first step in the revision of the endurance testing framework at EU level. towards a hybrid approach (bottom-up and top-down).
Separate limits for funds
The second major change in the new methodology is that there will not be a single threshold for the necessary funds. For the 2023 exercise, no single capital limit has been set, as banks will be assessed based on the relevant regulatory capital ratios with a static balance sheet.
The results of the stress tests will be used as input to the Supervisory Review and Evaluation Process (SREP), in which decisions are made about banks’ appropriate capital resources and future capital plans.
Larger sample
The third change foresees an increase in the number of banks that will take part in the 2023 exercise. The EU-wide stress test. in 2023 it will be conducted at the highest level of consolidation and will cover 76 banks, of which 63 are from the euro area, which is a significant increase in coverage compared to previous exercises, in which around 50 banks from the EU participated. E. and Norway. The 2023 stress tests will cover 75% of the EU banking sector, including Norway.
The endurance test across the E.U. in 2023 is initiated and coordinated by the European Banking Authority in close cooperation with the European Systemic Risk Board (ESRB), the competent authorities (including the Single Supervisory Mechanism – SSM) and the European Central Bank (ECB). The scenarios, methodology, minimum quality assurance guidance, templates and template guidelines will be agreed by the European Banking Authority’s board of supervisors.
The adverse macroeconomic scenario and any specific shocks for the type of risk associated with the scenario will be developed by the European Systemic Risk Board and the ECB, in close cooperation with the competent Authorities (national central banks) and the European Banking Authority.
Source: Capital
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