EBA Engages Banking Industry: Shaping the 2025 EU-Wide Stress Test Methodology

Introduction

The European Banking Authority (EBA) has initiated an informal consultation on its draft methodology, templates, and guidance for the 2025 EU-wide stress test. This marks the beginning of an essential dialogue with the banking industry, building upon the methodology used in the 2023 exercise with several notable enhancements. The primary aim of this stress test is to evaluate the resilience of EU banks under adverse economic conditions, providing critical data for the 2025 Supervisory Review and Evaluation Process (SREP).

Key Highlights

• Incorporation of CRR3: The new methodology integrates the upcoming Capital Requirements Regulation (CRR3), set to be implemented on January 1, 2025.
• Postponement of FRTB: The methodology reflects the Commission’s announcement to delay the fundamental review of the trading book (FRTB) until January 1, 2026.
• Enhanced Risk Sensitivity: Improvements include centralised net interest income (NII) projections and advancements in the market risk methodology.
• Geographical Reach and Proportionality: 68 banks from the EU and Norway, including 54 from the euro area, will participate, covering 75% of the EU banking sector. The inclusion of proportionality features aims to enhance efficiency and transparency.

Methodology and Process

The 2025 stress test will follow a primarily constrained bottom-up approach, complemented by supervisory top-down models. This dual approach ensures comprehensive net fee and commission income projections, alongside centralised NII projections. The breakdown of credit risk by sector of economic activity further refines the methodology.

With the introduction of CRR3, risk exposure amounts (REA) will be restated across risk areas, while the output floor will be calculated on the total REA. Despite the postponed implementation of the CRR3 market risk rules (FRTB), the EBA has adjusted the methodology to align with current regulations. The EBA remains prepared to update the methodology as needed following any new information or regulatory changes.

Proportionality and Efficiency

To promote efficiency and transparency, the EBA has emphasised proportionality for smaller and less complex banks. Instead of a single capital threshold, banks will be evaluated against relevant supervisory capital ratios within a static balance sheet assumption. These results will significantly influence the SREP, impacting decisions on bank capital resources and future capital planning.

Additional Insights

The EBA has also considered the operational needs of banks and supervisors by potentially adjusting submission dates and the banks' FAQ process to facilitate the transition to CRR3. This consultative approach aims to align the stress test process more closely with the practical requirements of all stakeholders involved.

Summary

The EBA's draft methodology for the 2025 EU-wide stress test represents a crucial step in assessing the stability and resilience of the EU banking sector. By incorporating new regulatory changes, enhancing risk sensitivity, and emphasizing proportionality, the EBA aims to ensure a robust and transparent evaluation process. The final methodology is expected to be published by the end of 2024, with the exercise launching in January 2025 and results anticipated by the end of July 2025.