How demanding and consistent is the 2018 stress test design in comparison to previous exercises?

13-06-2018

The new 2018 EBA EU-wide stress test exercise is similar to previous exercises for what concerns the employed methodology. The major change compared to the 2016 exercise is the inclusion of the new international accounting standards, which contributes to the increased severity of the exercise. The methodology incorporates several measures to guarantee internal consistency. However, despite all the progress made in designing the exercise, there remain critical areas concerning the application of a static-balance sheet assumption, the underrepresentation of liquidity risk and the implications of the lack of a fail-pass threshold. Improvements in these areas can enhance reliability of stress test results and empower their role as external and internal communication tools.

The new 2018 EBA EU-wide stress test exercise is similar to previous exercises for what concerns the employed methodology. The major change compared to the 2016 exercise is the inclusion of the new international accounting standards, which contributes to the increased severity of the exercise. The methodology incorporates several measures to guarantee internal consistency. However, despite all the progress made in designing the exercise, there remain critical areas concerning the application of a static-balance sheet assumption, the underrepresentation of liquidity risk and the implications of the lack of a fail-pass threshold. Improvements in these areas can enhance reliability of stress test results and empower their role as external and internal communication tools.

External author

Brunella BRUNO, Elena CARLETTI