The EU-wide stress test: past, present and future

In the aftermath of the 2008 Global Financial Crisis, supervisors have started performing stress testing exercises to assess the resilience of financial institutions to adverse financial and macroeconomic conditions. The EBA has so far conducted and coordinated five EU-wide stress tests. These have helped provide an assessment of banks’ vulnerabilities to periods of stress, foster transparency and make stress testing an integral element of both banking supervision and banks’ risk management. The results of the 2021 exercise confirmed the strength of banks capital positions even under a very severe scenario.  Going forward it is envisaged that the EU-wide stress will rely on a “hybrid” approach combining supervisory and banks’ own models to add operational efficiency. The incorporation of new risks such as cyber and ESG risks into stress testing is a priority but also a challenge. This will require the use of new data, modelling and risk management skills for both banks and supervisors.