EU Bank Stress Test 2023: Fit for Purpose

Simon Adamson – Head of Global Financials Research
Puja Karia – Senior Analyst - European Banks
Paola Biraschi – Senior Analyst - European Banks
Jennifer Ray – Senior Analyst - European Banks

  • The performance of banks in the EU-wide stress test was generally resilient, despite a more severe adverse scenario than in the previous exercise in 2021.
  • The weighted average fully-loaded CET1 ratio fell from 15.0% to 10.4% (-459 bp) under the end-2025 adverse scenario, with the average fully-loaded leverage ratio reduced from 5.4% to 4.3%.
  • On average, the capital depletion was a little lower than in the 2021 test, which saw the CET1 ratio fall by 485 bp under the adverse scenario, largely because banks started the stress test period with stronger earnings and asset quality.
  • By 2025, 37 of the 70 banks had breached their MDA trigger, meaning distributions were assumed to have been cut as part of the stress test.
  • The outlier is La Banque Postale, whose capital is wiped out in the stress test despite starting with a CET1 ratio of 14.7%, although applying IFRS 17 to its insurance business would significantly mitigate the capital depletion.
  • The EBA also released a separate ad-hoc analysis of banks’ holdings of bonds at amortised cost, showing that current and stressed unrealised losses look manageable.

The 2023 exercise covers a sample of 70 EU and EEA banks, including 57 in the eurozone, representing about 75% of EU banks’ total assets. The previous exercise in 2021 covered 50 banks. The EU-wide stress test is conducted at the highest level of consolidation, i.e., at the group level, and obviously does not include UK and Swiss banks. It is based on year-end 2022 figures, and the scenarios are applied over a 3-year period to end-2025. The Bank of England published the results of a similar exercise for UK banks recently. In addition to this, the ECB has published the results of its own 2023 stress test, which includes results for 98 euro-area banks. Of these 98, 57 were included in the EBA’s result release, and 41 are smaller banks outside of the EBA sample.

Banks that perform poorly in a stress test would normally be expected to see some pressure on their bonds and shares, even though the EBA does not apply hurdle rates or a pass/fail threshold. Stress test results feed in to the SREP (Supervisory Review and Evaluation Process) and into banks’ Pillar 2 Guidance (P2G). The ECB is also introducing P2G for banks’ leverage ratios.

We think the market will digest these results with moderate interest but little reaction – while there could be more scrutiny on individual banks’ disclosures than in the past, given the volatility in the banking sector in 1Q23, most banks came through the stress test in reasonably good shape.

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