Executive summary

In December 2018, the European Banking Authority (EBA) announced that the next European Union (EU)-wide banking stress test will be held in 2020. The previous one in 2018 had introduced significant changes in the methodology for credit risk assessment, incorporating requirements under the International Financial Reporting Standard 9 (IFRS 9). For the upcoming one, the EBA has issued a draft stress testing methodology for consultation. The final methodology will be published by the end of 2019. The test will be launched in January 2020 and results published by end-July. The goal is to consistently assess the resilience of the EU banking system to market shocks and to enforce market discipline.

The regulatory framework includes decisions taken before January 1, 2020, regarding the application of the Capital Requirements Regulation/Directive (CRR)/ CRD. The scope of consolidation is the perimeter of the banking group, as defined by CRR/CRD. Insurance activities are, therefore, excluded from balance sheet, profit & loss (P&L) and other comprehensive income (OCI). The use of new internal models and modifications is mandatory, if approved by December 31, 2019.

The objective of this paper is to analyse the changes in the EBA methodology, data and scope for the 2020 stress test. It reviews the changes for each type of risk under the purviews of scope, impact of changes on P&L and OCI, risk exposure amount (REA), and key constraints.