The biggest banks in Europe will soon face more stress tests to ensure they are in a position to weather any further storms in the financial markets following the global financial crisis.
The European Banking Authority (EBA) has agreed some key elements of an EU-wide stress test due to take place in 2016, based on a constrained bottom up approach, including a static balance sheet assumption and wide risk coverage to assess EU banks’ solvency.
The EBA opted for a less onerous transparency test this year over a stress test, involving 109 lenders, which will publishing information on bank balance sheets, covering composition of capital, leverage ratio, sovereign exposure, risk-weighted assets and credit risk exposure.
The new stress test for 2016, which will feature many aspects of the 2014 EU-wide test will build on lessons learned from previous exercises to ensure the results are incorporated as an input to that process.
This includes a "static" balance sheet that ignores changes to capital during the test, in order to stop the possibility of the tests becoming skewed.
The tests come after those last year, which 24 European banks failed. The banks were given nine months to shore up their finances or risk being shut down. No UK banks were included in this.
The exercise is expected to be launched in the first quarter of 2016, with the release of the detailed scenario and methodology.
Assessment and quality checks are expected to be concluded by the third quarter of 2015, which is when individual banks’ results will be released.
Draft methodology will be discussed before the end of 2015 and detailed aspects of the exercise will be announced in the coming months.