The European Banking Authority (EBA) published today the results of its 2021 EU-wide stress test, which involved 50 banks from 15 EU and EEA countries, covering 70% of the EU banking sector assets. This exercise allows to assess, in a consistent way, the resilience of EU banks over a three-year horizon under both a baseline and an adverse scenario, which is characterised by severe shocks taking into account the impact of the pandemic. The individual bank results promote market discipline and are an input into the supervisory decision-making process. The adverse scenario has an impact of 485 bps on banks’ CET1 fully loaded capital ratio (497 bps on a transitional basis), leading to a 10.2% CET1 capital ratio at the end of 2023 (10.3% on a transitional basis).

Summary of key results

Since the previous EBA EU-wide stress test in 2018, banks have continued building up their capital base, and at the beginning of the exercise (i.e. end-2020), had a CET1 ratio of 15% on a fully loaded basis (15.3% on a transitional basis), the highest since the EBA has been performing stress tests. This was achieved despite an unprecedented decline of the EU’s GDP and the first effects of the Covid-19 pandemic in 2020.

This year’s stress test is characterised by an adverse scenario that assumes a prolonged Covid-19 scenario in a “lower for longer” interest rate environment. With a cumulative drop in GDP over the three-year horizon by 3.6% in the EU, and a negative cumulative drop in the GDP of every member state, the 2021 adverse scenario is very severe, also having in mind the weaker macroeconomic starting point in 2020 as a result of the pandemic. The baseline scenario also provides some comparable information about individual banks in the context of a gradual exit from the pandemic.

Against this background, under the adverse scenario, the EU banking system as a whole would see its CET1 reduced by 485 bps on a fully loaded basis (497 bps on a transitional basis) after three years, while staying above 10%. The results also show dispersion across banks. For instance, those banks more focused on domestic activities or with lower net interest income (NII), display a higher depletion.

Credit losses and lower income are the main drivers

The overall impact results in a CET1 depletion of EUR 265bn, and in an increase of the total risk exposure amount (REA) of EUR 868bn at the end of the three-year horizon, resulting in a 485 bps decrease in the CET1 ratio. The key specific risk drivers contributing to the overall impact on CET1 capital ratio on a fully loaded basis include:

• credit risk losses of EUR 308bn (i.e. -423 bps of CET1);
• market risk losses, including counterparty credit risk, of EUR 74bn (-102 bps of CET1);
• operational risk losses, including conduct risk, of EUR 49bn (-68 bps of CET1).

The final CET1 capital ratio is also affected by a sluggish economic environment. The contribution of income only stands at 290 bps, significantly lower compared to previous exercises, mainly as a result of lower NII.

Special focus on the Covid-19 support measures

Based on the stress test methodology, EBA-compliant moratoria are assumed to have expired, and their mitigating effect is, therefore, disregarded. On the other hand, Public Guarantee Schemes (PGS) benefitting certain exposures are assumed to stay in place throughout the stress test horizon.

The 2021 exercise provides additional disclosures on the exposures that have been subject to Covid-19 support measures – i.e. moratoria and PGS. In the adverse scenario, banks with more exposures towards sectors highly affected by the pandemic display an increase of their loans in stage 3 (with a ratio of stage 3 to total loans from 2.8% in 2020 to 9.1% in 2023) which shows a higher credit risk when compared to the overall sample of banks (the overall stage 3 ratio increased from 2.1% to 6.3%).

In terms of Covid-19 support measures, at the beginning of the exercise, 4.2% of total exposures had benefitted of EBA-compliant moratoria (of which 1.4% had not yet expired as of December 2020) and 1.6% of total exposures benefitted from PGS.

Given the importance of tracking the evolution of credit risk for loans that had been subject to public support measures, it is worth highlighting the higher increase of the stage 3 ratio over the stress test horizon for loans under moratoria (from 3.1% to 13.4%). For exposures under PGS, the stage 3 ratio reaches 6.8% in 2023 (1.1% in 2020).

Transparency and input to the SREP

The EBA published the granular bank results, including detailed information at the starting and end point of the exercise, under both the baseline and the adverse scenarios.

The EBA EU-wide stress test does not consider a defined pass/fail threshold. However, it provides an important input for the Pillar 2 assessment of banks by their supervisors. The results of the stress test will assist Competent Authorities in assessing banks’ ability to meet applicable prudential requirements under the stress scenario and form a solid ground for discussion between the supervisor and the individual banks on their capital and distribution plans, in the context of the normal supervisory cycle.

Notes to the editors

• The EU-wide stress test is initiated and coordinated by the EBA and undertaken in cooperation with the EU Competent Authorities, including the European Central Bank (ECB) for the Banking Union, and the European Systemic Risk Board (ESRB).
• The EBA develops a common methodology and is responsible for the final dissemination of the outcome of the exercise. The adverse scenario is designed jointly by the ESRB and the ECB, and the baseline scenario is provided by the national central banks. Competent Authorities, including the ECB Banking Supervision for the euro area banks, are responsible for ensuring that banks correctly apply the common methodology. In particular, they are responsible for assessing the reliability and robustness of banks’ assumptions, data, estimates and results and the resulting supervisory actions.
• The EU-wide stress test is based on the implementation by the banks of the EBA’s methodology and the two scenarios, under the close scrutiny of their supervisors (“constrained bottom-up” exercise). The support measures deployed in response to the COVID-19 pandemic have required some methodological adjustments. EBA-compliant moratoria were assumed to expire at the end of 2020, while the guarantees related to PGS were assumed to remain in place over the stress test horizon. The amendments to the capital requirements regulation published in June 2020 (the ‘CRR Quick Fix’) were taken into account. Compared to the 2018 exercise, the measurement of the impact of the foreign exchange variation has also been adjusted.
• This stress test was initially scheduled for 2020 but postponed by 1 year as part of the temporary relief measures decided by the EBA due to the pandemic. Instead, in 2020, the EBA has released two Transparency exercises (in late Spring and Autumn), to inform the public on the conditions of the EU banking sector at the start of the COVID-19 crisis and the impact of the crisis in the first half of 2020, without any additional reporting burden for banks. In addition, in May 2020 the EBA published a Thematic Note (EBA Rep/2020/17) analysing the preliminary effects of COVID-19 pandemic on the EU banking sector, including a sensitivity analysis on parts of banks’ credit and market risk portfolios.

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