How Relevant Are the New Elements in the 2016 Stress Test Design?

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.This note focuses on the elements of novelty that characterise the 2016 stress test, based on the methodological notes released by the European Banking Authority, and discusses in closer detail the following key aspects:

• the request for specific forecasts concerning 'conduct risk'
• the greater attention towards risks originated by foreign exchange exposures
• the lack of a 'pass/fail' threshold that partitions tested banks into 'safe' and 'unsafe' ones
• and the change in the sample size of banks required to take the test.

External author: Andrea Resti

Note the separate In-Depth Analysis by Harry Huizinga with the same title (see related url belows). The summary of that report says: The 2016 EU-wide stress test requires banks to assess the impact of exchange rate movements on the quality of their foreign exchange lending. This is useful but not sufficient information for supervisors to be able to assess the implications of exchange rate risk for bank solvency. The 2016 stress test further asks banks to report in detail the expected future costs associated with already known misconduct cases. Information of this kind enables supervisors to ascertain whether banks’ current levels of provisioning for such costs are adequate. If not, supervisors should follow up by requiring banks to increase their provisioning levels to reflect projected future costs.

• Primary Source

European Parliament: Directorate-General for Internal Policies of the Union: Publications available via the EU Bookshop http://bookshop.europa.eu/en/directorate-general-for-internal-policies-of-the-union-cbf.cKABstF7wAAAEjwYYY4e5K/

ESO: Background information: EBA launches 2016 EU wide stress test exercise http://www.europeansources.info/record/press-release-eba-launches-2016-eu-wide-stress-test-exercise/

European Parliament: European Parliamentary Research Service: In-Depth Analysis, June 2016: How Relevant Are the New Elements in the 2016 Stress Test Design? http://www.europarl.europa.eu/RegData/etudes/IDAN/2016/528740/IPOL_IDA(2016)528740_EN.pdf

European Parliament: European Parliamentary Research Service: In-Depth Analysis, June 2016: How Relevant Are the New Elements in the 2016 Stress Test Design? (by Harry Huizinga) http://www.europarl.europa.eu/RegData/etudes/IDAN/2016/528742/IPOL_IDA(2016)528742_EN.pdf

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