The Committee of European Banking Supervisors (CEBS), the European Central Bank (ECB) and the European Commission welcomed on 23 July the publication of the results of the EU-wide stress-testing exercise,  which was prepared and conducted by the CEBS and national supervisory authorities, in close cooperation with the ECB. Institutions were particularly supportive with the transparency under which the exercise was conducted, given the specific market circumstances under which banks currently operate.

The Committee of European Banking Supervisors (CEBS) was mandated by the ECOFIN of the European Council to conduct a second EU-wide stress test exercise in cooperation with the European Central Bank (ECB), the European Commission and the EU national supervisory authorities.

The overall objective of the 2010 exercise is to provide policy information for assessing the resilience of the EU banking system to possible adverse economic developments and to assess the ability of banks in the exercise to absorb possible shocks on credit and market risks, including sovereign risks.

Scope of EU Bank Stress-Testing

The 2010 stress test exercise has been conducted on a sample of 91 European banks. In total national supervisory authorities from 20 EU Member States participated in the exercise. In each of the 27 Member States, the sample has been built by including banks, in descending order of size, so as to cover at least 50% of the respective national banking sector, as expressed in terms of total assets.

As the stress test has been conducted on the highest level of consolidation for the bank in question, the exercise also covers subsidiaries and branches of these EU banks operating in other Member States and in countries outside Europe. As a result, for the remaining 7 Member States where more than 50% of the local market was already covered through the subsidiaries of EU banks participating in the exercise, no further bank was added to the sample. The 91 banks represent 65% of the total assets of the EU banking sector as a whole.

The stress test focuses mainly on credit and market risks, including the exposures to European sovereign debt. The focus of the stress test is on capital adequacy; liquidity risks were not directly stress tested.

Risk Report

The 2010 EU-wide Bank stress testing report provides details on the scenarios, methodologies and aggregate results of the stress test exercise.

In total, aggregate impairment and trading losses under the adverse scenario and additional sovereign shock would amount to 566bn € over the years 2010-2011.

The aggregate Tier 1 ratio, used as a common measure of banks’ resilience to shocks, under the adverse scenario would decrease from 10.3% in 2009 to 9.2% by the end of 2011 (compared to the regulatory minimum of 4% and to the threshold of 6% set up for this exercise). The aggregate results depend partly on the continued reliance on government support for currently 38 institutions in the exercise.

The aggregate Tier 1 ratio incorporates approximately 197bn € of government capital support provided until 1 July 2010, which represents 1.2 percentage point of the aggregate Tier 1 ratio. As a result of the adverse scenario after a sovereign shock, 7 banks would see their Tier 1 capital ratios fall below 6%.

The threshold of 6% is used as a benchmark solely for the purpose of this stress test exercise. This threshold should by no means be interpreted as a regulatory minimum. All banks that are supervised in the EU need to have at least a regulatory minimum of 4% Tier 1 capital.

For the institutions that failed to meet the threshold for this stress test exercise, the competent national authorities are in close contact with these banks to assess the results of the test and their implications, in particular in terms of need for recapitalisation.