EBA's 2021 EU-wide stress level shows that banks continue building their capital base

Since the previous EBA EU-wide stress test in 2018, banks have continued building up their capital base, and at the beginning of the exercise (end-2020), had a CET1 ratio of 15% on a fully loaded basis (15.3% on a transitional basis), the highest since the EBA has been performing stress tests. This was achieved despite an unprecedented decline of the EU’s GDP and the first effects of the COVID-19 pandemic in 2020.

With a cumulative drop in GDP over the three-year horizon by 3.6% in the EU, and a negative cumulative drop in the GDP of every member state, the 2021 adverse scenario is said to be severe, also having in mind the weaker macroeconomic starting point in 2020 because of the pandemic.

Against this background, under the adverse scenario, the EU banking system would see its CET1 reduced by 485 bps on a fully loaded basis (497 bps on a transitional basis) after three years, while staying above 10%. The overall impact results in a CET1 depletion of EUR 265 billion, and in an increase of the total risk exposure amount (REA) of EUR 868 billion at the end of the three-year horizon, resulting in a 485 bps decrease in the CET1 ratio.

In terms of COVID-19 support measures, at the beginning of the exercise, 4.2% of total exposures had benefitted of EBA-compliant moratoria (of which 1.4% had not yet expired as of December 2020) and 1.6% of total exposures benefitted from PGS.

The EBA EU-wide stress test does not consider a defined pass/fail threshold. However, it provides input for the Pillar 2 assessment of banks by their supervisors. The results of the stress test will assist Competent Authorities in assessing banks’ ability to meet applicable prudential requirements under the stress scenario and form a ground for discussion between the supervisor and the individual banks on their capital and distribution plans, in the context of the normal supervisory cycle.