The test is designed to assess the institutions' resilience to severe market conditions. The use of a common methodology, uniform scenarios and harmonised disclosure requirements is to ensure results that are coherent and comparable across the EU, shedding further light into the EU banking sector and facilitating the work of supervisors. EBA and the European Central Bank (ECB) already published information on the key elements of the stress test in February.

Methodology

The common methodology and underlying assumptions cover a wide range of risks including: credit and market risks, exposures towards securitisation, sovereign and funding risks. To ensure consistency, the methodology rests on a number of key constraints. These include a static balance sheet assumption, which precludes any defensive actions by banks, prescribed approaches to market risk and securitisation, and a series of caps and floors on net interest income, risk weighted assets (RWAs) and net trading income.

Other key methodological components are a shock that impacts sovereign bonds carried at market value and a shock to banks' funding costs that pass-through to the asset and liability side in a conservative asymmetric fashion.

Scenarios

Together with the methodology, EBA also released the macroeconomic scenarios to be used in the stress test. While the baseline scenario reflects the eurozone's expected economic development, the adverse scenario, designed by the ESRB, reflects the systemic risks that are currently assessed as representing the most pertinent threats to the stability of the EU banking sector:

• an increase in global bond yields amplified by an abrupt reversal in risk assessment, especially towards emerging market economies;
  
• a further deterioration of credit quality in countries with feeble demand;
  
• stalling policy reforms jeopardising confidence in the sustainability of public finances; and
  
• the lack of necessary bank balance sheet repair to maintain affordable market funding.