EBA stress test

The EBA stress test is a periodic supervisory exercise coordinated by the European Banking Authority, usually in cooperation with the European Central Bank (through its Single Supervisory Mechanism), the European Systemic Risk Board, and national competent authorities. Its purpose is to assess whether the largest EU banks hold enough capital to keep lending and absorb losses through a severe but plausible downturn.

Each exercise applies a common methodology to participating banks over a multi-year horizon (typically three years). The ESRB designs an adverse scenario featuring shocks to GDP, unemployment, property prices, equity markets, interest rates, and sovereign spreads, alongside a baseline scenario drawn from European Commission forecasts. Banks then project credit losses, market losses, net interest income, operational risk losses, and risk-weighted assets under both paths, with results expressed as the impact on the Common Equity Tier 1 (CET1) ratio.

Key features:

• It is a constrained bottom-up exercise: banks run their own models but under strict EBA assumptions, including a static balance sheet (no management actions, no new business mix).
• Unlike earlier rounds, there is no single explicit pass/fail threshold. Results feed into the supervisory review (SREP) and into Pillar 2 capital guidance set by the ECB or national supervisors.
• Coverage has typically included roughly 50–70 banks representing the bulk of EU banking-sector assets, with smaller banks tested separately by the ECB.
• Results are published bank-by-bank, providing granular disclosure to markets.

The EBA has run EU-wide exercises in 2011, 2014, 2016, 2018, 2021, and 2023, with the 2025 round expanded in scope. The framework evolved from the earlier CEBS tests of 2009–2010, which were widely criticised after Irish and Spanish banks that had "passed" required bailouts shortly afterwards. Subsequent rounds tightened methodology, expanded disclosure, and integrated the exercise more deeply into Banking Union supervision.