EBA launches EU-wide stress tests for banks; results for Greek lenders in May

The European Banking Authority (EBA) launched on Wednesday its 2018 EU-wide stress test and released its macroeconomic scenarios – a baseline and an adverse -on which it will base its forecasts.

The adverse scenario implies a deviation of EU GDP from its baseline level by 8.3 percent in 2020, resulting in the most severe scenario to date. The EBA expects to publish the results of the exercise by 2 November 2018.

The stress test is designed to provide supervisors, banks and other market participants with a common analytical framework to consistently compare and assess the resilience of EU banks to economic shocks. “For the first time, it incorporates IFRS 9 accounting standards. No pass-fail threshold has been included as the results of the exercise are designed to serve as an input to the Supervisory Review and Evaluation Process (SREP),” EBA said.

The EBA’s 2018 stress test methodology was published in November 2017 and is to be applied to the scenarios released on Wednesday.

The baseline scenario is in line with the December forecast published by the European Central Bank (ECB), while the adverse scenario assumes the materialisation of four systemic risks, which are currently deemed as representing the most material threats to the stability of the EU banking sector.

The adverse scenario is designed to ensure an adequate level of severity across all EU countries. The implied EU real GDP growth rates under the adverse scenario amount to -1.2 pct, -2.2 pct and +0. pct, in 2018, 2019 and 2020 respectively. Overall, the scenario implies a deviation of EU GDP from its baseline level by 8.3 pct in 2020, resulting in the most severe scenario in terms of GDP deviation from baseline levels compared with the previous EBA exercises.

According to EBA, the four Greek banks directly supervised by the European Central Bank (ECB) will undergo the same stress test under the EBA scenario and methodology. However, in order to complete the test before the end of the third European Stability Mechanism stability support program for Greece, the timetable will be accelerated and the results are expected to be published in May instead of November.

Regarding EBA’s macroeconomic scenarios for Greece, the cumulative GDP growth under the adverse scenario is -10 percent by 2020 compared with the baseline scenario. The baseline scenario forecasts economic growth of 2.4 percent this year, 2.5 percent in 2019 and 2.4 percent in 2020, while the adverse growth scenario sees GDP at -1.3 percent this year, -2.1 percent in 2019 and 0.2 percent in 2020.

Concerning unemployment in the country, EBA’s baseline rate is for a gradual fall to 19.9 percent in 2018, 18.3 percent next year and 16.6 percent in 2020, while the adverse scenario forecasts a fall to 20.6 percent this year, 20 percent in 2019 and 19.1 percent in 2020, which means there is a maximum deviation of 2.5 percentage points from the baseline.

Inflation this year is seen at 0.9 percent in 2018, 1.0 percent in 2019 and 1.1 percent in 2020 according to the baseline scenario, versus 0.0 percent in 2018, -1.1 percent in 2019 and -1.8 percent in 2020, according to the adverse.

In calculating residential real estate prices, the baseline scenario forecasts small rate changes, with -0.5 percent in 2018, 0.5 percent in 2019 and 1.0 percent in 2020, while the adverse sees a significant drop by -7.3 percent this year, -6.7 percent in 2019 and -3.6 percent in 2020, with a level of deviation of -17.4 percent by 2020 compared with the baseline.