AFME says actions to strengthen resilience are paying off in response to 2023 EU-wide stress test results

AFME has responded to the EU-wide stress test results released by EBA. AFME, representing its member banks that participated in the test, noted the positive outcomes and credited the strengthening of the EU banking sector’s resilience through combined efforts of banks and regulators.
Key points highlighted by AFME regarding the stress test results included:
– Improvement in Capital Depletion: The stress test results showed better capital preservation compared to the previous test in 2021, with an average CET1 capital depletion of 459 bps under the adverse scenario, compared to 497 bps in 2021.
– NII Impact: Net interest income was a significant contributor to increased earnings and capital over the stress period, even when capped at the starting point level.
– Credit Risk Losses: Credit risk losses had a negative impact, contributing to a depletion of 405 bps in CET1 ratios under the severe adverse economic scenario.
– Wholesale Activities and Trading Income: NTI saw a notable drop, largely due to losses from economic hedges held with a trading intent. The constraints in the methodology had a significant impact on market and securitization businesses.
– Concerns and Recommendations: AFME expressed concerns about certain aspects of the stress test methodology, including market risk methodology, lack of coherence, over-conservatism, and constraints that may not adequately reflect different business models. They emphasized the importance of transparency and collaboration in improving the methodology.
– Future Directions: AFME looked forward to collaborating with the EBA to refine the stress test methodology for the 2025 test. They also recommended reducing ad-hoc templates and considering targeted exercises during alternate years to manage workload and commitments effectively.
AFME suggested revisiting or recalibrating certain constraints that sometimes override banks‘ own projections. AFME emphasized the need for a balanced approach that incorporates both standardized supervisory measures and accommodations for individual bank characteristics. AFME also mentioned the upcoming change in the banking package (CRR 3/CRD 6) and its impact on the EU stress test framework. They proposed a comprehensive evaluation of the stress test methodology, especially due to changes in the calibration of the Pillar 1 framework and potential overlaps between Pillar 1 and Pillar 2 capital risk coverage.