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EBA Stress Test Confirms BOE Results for UK Banks
5th November 2018
EBA Stress Test Results
Following the European Banking Authority’s (EBA) stress test publication on 2 November, the Bank of England has now published a statement that confirms the EBA’s results showed that the four UK banks that participated would be resilient to a severe economic and market stress.
The stress testing assumed within the EBA’s scenario was, for the first time as severe as that used by the Bank of England’s own annual stress test of major UK banks, that has been assumed since 2014.
The European Banking Authority’s stress test covered a wide sample of 48 banks across 15 countries, however the EBA’s stress test uses a constrained methodology that doesn’t take into account the actions banks would undertake in situations of real stress, such as reducing employee remuneration.
However, despite these constraints, and whilst the severity of the downturn assumed for the UK was more severe than that for other European countries, it seems the UK banks would hold up to the strain and absorb the effect of the stress scenario in their capital buffers.
The results of the Bank of England Stress Test will be published by the Bank of England in one month’s time on 5th December 2018.
Given there has been a new accounting standard introduced for banks in 2018 – IFRS 9, the EBA has also published stress test results upon that basis, which the Bank of England has also said that it will do.
A new accounting standard based upon International Financial Reporting Standards – IFRS9 - has been introduced for banks this year. Whilst it is being phased in, this ‘expected loss’ accounting standard will likely mean that banks have to make more provisions for losses on their loans earlier in situations of stress.
In the EBA’s published stress test results, the new IFRS 9 accounting standard will result in bigger drawdowns of capital in stress tests as provisions are made earlier.
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