How demanding and consistent is the 2018 stress test design in comparison to previous exercises?

Author (Corporate)
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Series Details June 2018
Publication Date June 2018
ISBN 978-92-846-3133-9
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Please note: Each In-Depth Analysis is assigned a DOI (digital object identifier), which is a safe and long term way of ensuring a hyperlink to the full text of this report. However, when ESO creates this record, on occasion the DOI still has not been activated by the EU Bookshop. If you find the source url hyperlink does not work please use the alternative location hyperlink listed as a related url.The European Parliamentary Research Service published two separate reports called How demanding and consistent is the 2018 stress test design in comparison to previous exercises? in June 2018.

+ Vol.1
The 2018 EU-wide stress test required banks to evaluate the impact on profits and capital of common macroeconomic scenarios for 2018-2020. The methodology set up by the EBA addressed four main sources of uncertainty:

+ credit risk
+ market risk
+ financial risks on net interest income
+ operational risk.

Credit risk was assessed on the basis of the new IFRS 9 accounting standard. Market risk included a valuation of illiquid, hard-to-price level 2/3 financial instruments. Net interest income was assumed to suffer from an asymmetric increase in the rates earned on assets and paid on liabilities. Operating risk included conduct risk and took into account past loss events.

This written advice highlighted some weaknesses in the EBA methodology, which might lead to a different degree of conservativeness for some business models or countries. It also discussed ways to make future stress tests more realistic and reliable, by addressing resource gaps and improving governance.

+ Vol.2
The new 2018 EBA EU-wide stress test exercise was similar to previous exercises for what concerned the employed methodology. The major change compared to the 2016 exercise was the inclusion of the new international accounting standards, which contributed to the increased severity of the exercise. The methodology incorporated several measures to guarantee internal consistency.

However, despite all the progress made in designing the exercise, there remained critical areas concerning the application of a static-balance sheet assumption, the underrepresentation of liquidity risk and the implications of the lack of a fail-pass threshold. Improvements in these areas could enhance reliability of stress test results and empower their role as external and internal communication tools.

Source Link http://dx.publications.europa.eu/10.2861/536397
Related Links
European Parliament: European Parliamentary Research Service: In-Depth Analysis, June 2018: How demanding and consistent is the 2018 stress test design in comparison to previous exercises? http://www.europarl.europa.eu/RegData/etudes/IDAN/2018/614511/IPOL_IDA(2018)614511_EN.pdf
European Parliament: European Parliamentary Research Service: In-Depth Analysis, June 2018: How demanding and consistent is the 2018 stress test design in comparison to previous exercises? Vol.2 http://www.europarl.europa.eu/RegData/etudes/IDAN/2018/614520/IPOL_IDA(2018)614520_EN.pdf

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