EBA publishes the results of its 2023 EU-wide stress test

EBA assessed with the 2023 EU-wide stress test the resilience of European banks under adverse economic conditions. The test involved 70 banks from 16 EU and EEA countries, covering 75% of the EU banking sector’s assets. The adverse scenario combined a severe recession, higher interest rates, and credit spreads, resulting in a cumulative 6% decline in EU GDP over a three-year horizon.
Key findings from the stress test:
– Capital Resilience: European banks showed resilience under the adverse scenario. The average fully loaded CET1 capital ratio at the start of the exercise was 15%, reflecting a solid capital position.
– Capital Depletion: Despite the adverse scenario’s challenges, EU banks remained capitalised, with the fully loaded CET1 capital ratio declining to 10.4% by the end of the scenario. The capital depletion under the adverse stress test scenario was 459 bps.
– Earnings and Asset Quality: Higher earnings and better asset quality at the beginning of 2023 helped moderate capital depletion under the adverse scenario. NII was a significant contributor to higher earnings.
– Credit Risk: While the adverse scenario resulted in significant combined credit losses of EUR 496 billion, EU banks remained sufficiently capitalised to support the economy even in severe stress conditions.
– Market and Operational Risks: Market risk losses due to interest rate and credit spread increases impacted the CET1 ratio by 112 bps, while operational risk losses had a negative impact of 62 bps.
– Sectoral Analysis: The stress test included a detailed analysis of banks‘ sectoral exposures. Credit losses were concentrated in sectors such as large corporates, SMEs, manufacturing, and accommodation/food services.
– Capital Buffers: Under the adverse scenario, banks‘ capital buffers remained above the OCR. The median OCR buffer was 378 bps relative to the total SREP capital requirement.
– Enhancements: The 2023 stress test featured enhancements, including an increased sample size of 20 additional banks, the introduction of top-down elements for NFCI, and a detailed analysis of banks‘ sectoral exposures.
The stress test results emphasized the importance of maintaining vigilance, especially given the high level of macroeconomic uncertainty. Supervisors and banks should be prepared for potential worsening economic conditions. While banks exhibited resilience, the results will guide supervisory discussions and potential actions to ensure capital adequacy and ongoing support to the economy.