The adverse scenario assumes a hypothetical worsening of geopolitical tensions leading to a severe decline in GDP with persistent inflation and high interest rates. The adverse scenario is designed to ensure a significant severity of various macro-economic and financial shocks across all EU countries and, for the first time, depicts a breakdown of the shocks (on real gross value added) by economic sectors.

Read the EBA press release

2021 vs. 2023 EBA Stress Testing Exercise

 

 

  • The 2023 methodology covers the same risk areas as the stress test 2021​
  • Additional proportionality considerations have been introduced into the new methodology to alleviate some organizational burden by stress testing.
  • The methodology will continue to rely mainly on a constrained bottom-up approach. However, the EBA decision is to move to a hybrid framework (bottom-up and top-down) on a step-by-step approach. In 2023, the exercise includes new features: projections on net fee and commission income (NFCI) which will be provided to banks based on supervisory top-down models. This hybrid model will make it possible in the future to reduce the pressure on banks and the workload by balancing this load with the support of direct supervision from the EBA.
  • Increased focus on market risk models given the macroeconomic situation and challenges around transition from long periods of low interest rate environment.
  • Sample coverage of banks have been increased (75% total consolidated assets as of end 2023 instead of 70% coverage as per 2021 exercise), so 26 banks have been added to the stress test sample of 50 banks in the 2021 exercise.​
  • New sector-specific reporting template has been included. It requires the banks to show how they have factored the heterogeneity of sectoral exposures and scenarios into their credit risk projections.

Our Expectations from 2023 Stress Test Exercise

  • Continuity: Stress test 2023 is going to be characterized by continuation of the evolution from the Pass/Fail approach to focus on specific risk drivers such as high inflation or emerging from low interest rates environment​.
  • Fostering bank capabilities: Supervisors will assess bank capabilities on the back of the stress test results and have the ability to provide robust estimates using internal risk management framework​s.
  • Investment to Technology: It is important for banks to invest into the stress testing framework to deliver robust stress test results and show the capabilities of internal risk management frameworks​.

How our team can add value

  • How our team can add value

    End-to-End Support: Provide services across all three Lines of Defense (Stress testing model development, Model validation & assurance and Internal Audit support). Design strategic approaches to Stress testing model development and integration within bank infrastructure.​

  • How our team can add value

    Project Management: Introduce a robust project management framework that is critical in order to meet timelines in a challenging development environment. ​

  • How our team can add value

    Data Solutions: Provide integrated data solution for data preparation including data analytics, remediation and integration. ​

  • How our team can add value

    Stress test: Build best-in-class sensitivity analysis and stress testing models across different risk types respecting best industry practices and latest regulatory expectations. ​

  • How our team can add value

    Stakeholder Support: Engage all relevant stakeholders into the model build process at all relevant stages and provide documentation support. Support submission of stress testing results to regulators, supervisors and key bank stakeholders.​

Related experts

Dwayne Price
Dwayne Price
Partner – Risk Advisory
Dublin
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