The EBA Starts Dialogue with the Banking Industry on 2025 EU-Wide Stress Test Methodology

• The EBA has published for informal consultation its draft methodology, templates and guidance for the 2025 EU-wide stress test. The methodological note outlines the framework for assessing the resilience of EU banks under adverse market conditions. Key aspects include:
• Objectives and Scope

- Purpose: To provide a consistent framework for comparing EU banks' resilience, inform supervisory review (SREP), and enhance transparency.

- Sample: Includes banks covering about 75% of the euro area banking sector, focusing on those with assets over EUR 30 billion.

• Methodology

- Consolidation: Conducted at the highest level of consolidation, excluding insurance activities.

- Scenarios: Utilizes a baseline and an adverse macroeconomic scenario over 2025-2027.

- Static Balance Sheet: Assumes no change in the balance sheet structure throughout the period.

• Risk Coverage

- Credit Risk: Stresses on sovereign exposures and securitizations with prescribed loss parameters.

- Market Risk, CCR, CVA: Full revaluation of positions considering liquidity and model uncertainty.

- Net Interest Income (NII): Projects impacts on interest-earning and interest-paying positions.

- Operational Risk: Includes potential future losses from conduct and other operational risks.

• Capital and Regulatory Framework

- Capital Requirements: Applies regulatory framework as of December 31, 2024, transitioning to CRR3/CRD6.

- Hurdle Rates: No specific thresholds; results inform SREP assessments.

• Constraints and Assumptions

- Projections: Banks use own models with strict constraints and supervisory review.

- Static Assumptions: No change in business mix or model; no growth assumed.

Original source: The EBA starts dialogue with the banking industry on 2025 EU-Wide stress test methodology | European Banking Authority (europa.eu)