Macro-financial scenario for the 2023 EU-wide banking sector stress test

The European Systemic Risk Board, ESRB, has published the latest macro-financial scenarios to be used by financial institutions for the 2023 EU-wide banking sector stress test. The scenarios were developed by the ESRB’s Task Force on Stress Testing in cooperation with the European Central Bank (ECB) and were recently sent to the European Banking Authority (EBA) for application.
The scenarios incorporate a wide variety of risks that financial institutions COULD face and are based on the December 2022 macro-economic projections of the ECB. The variables which are part of the scenarios and whose adverse developments are simulated include
– the gross domestic product (GDP),
– inflation,
– employment rates,
– stock prices,
– interest rates,
– … and many others.
The scenarios are primarily based on two key assumptions:
(1) an increase in geopolitical tensions ultimately leading to higher inflation, higher interest rates, lower economic activity, and stagflation and
(2) a re-occurrence of the COVID-19 pandemic leading to even higher inflation, particularly in commodity prices, low consumption, and increased unemployment rates.
Both assumptions indicate little consumer and business confidence and therefore the scenarios primarily simulate a „severe contraction of real GDP in the EU“ by 6% between 2022 and 2025 and a global recession with economies contracting by as much as 8.3% (UK).
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For more details on the scenarios, please refer to the original publication of the ESRB. The templates to be used in this context are found in Link background and are attached to this Event.