The EBA has published further details of its 2018 stress test, including the baseline and adverse scenarios.
The stress tests will be run for 48 EEA banks, with the ECB conducting stress tests for 37 directly supervised banks using the EBA's methodology, templates and scenarios. Individual bank results will be published on 2 November 2018. There is no “pass/fail” test, but the results will feed into the Supervisory Review and Evaluation Process, including the setting of Pillar 2 Guidance for individual banks.
The baseline scenario is for steady growth in real GDP of 1.5 - 2.0 percent in most EEA countries from 2018 to 2020. The adverse scenario is for negative real GDP growth, in particular in 2018 and 2019, bringing real GDP to 8.3 percent below its baseline level (on average across the EU) by the end of 2020. This is a more severe adverse scenario than used in previous EBA stress tests. The adverse scenario also includes country-specific higher short- and long-term interest rates; sharp declines in real estate and equity prices; higher unemployment; lower inflation; and prescribed shocks to credit risk losses for sovereign exposures.
KPMG Ireland has significant experience gained from supporting many clients in previous regulatory stress tests, and in preparatory engagements for the 2018 stress test exercise; and through a suite of tools including a template validation checker, credit risk, IFRS 9 application (which requires a greater demand on forecasting methodologies and data quality), and a top-down fast analysis tool.