2014 European Union bank stress test

The European Union-wide banking stress test 2014 was conducted by the European Banking Authority in order to assess the resilience of financial institutions in the European Union to a hypothetical adverse market scenario. In total, 123 major EU banks participated in the exercise. 24 banks failed the test with an overall capital shortfall of EUR 24.2 billion under the adverse scenario.

The European Banking Authority (EBA) aims to ensure the proper functioning of financial markets and the stability of the financial system in the EU. To this end, the EBA has the right to conduct the EU-wide stress tests, in cooperation with the European Systemic Risk Board (ESRB). Such exercises are designed to test the resilience of financial institutions to adverse market developments.

The stress tests are performed in cooperation with the ESRB, the European Central Bank (ECB), national competent authorities and the European Commission. In particular, the EBA was responsible for the common methodology and disclosure of the results. The ESRB and the European Commission designed the underlying macroeconomic scenarios. The quality assurance process of banks’ results was led by the ECB and national competent authorities. Moreover, the ECB conducted the Asset Quality Review that served as a starting point of the stress test.

In 2014, the ECB performed the Comprehensive Assessment in parallel before taking over its supervisory role in the Single Supervisory Mechanism (SSM) on November 4, 2014. The results of the stress test were an integral part of the Comprehensive Assessment.

Banks needed to assess the impact of a macroeconomic baseline and adverse scenario. The scenarios each covered a period of three years (2014-2016). The baseline scenario is based on the macroeconomic growth forecast of the European Commission whereas the adverse scenario describes a hypothetical worldwide recession.

Risk types considered in the stress test included credit risk, market risk, sovereign risk, securitization and cost of funding. Both trading and banking book assets will be subject to stress, including off-balance sheet exposures.

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