Press Release

2018 European Stress Test: What to Expect

Banking Organizations
October 31, 2018

Summary

The results of the 2018 EBA stress test exercise will be announced this Friday, 2nd November. DBRS considers the 2018 adverse scenario included in the stress test to be in aggregate more severe than the one outlined in the 2016 exercise. In addition, DBRS notes that although there is no pass/fail threshold, results will be key to determining the Pillar 2 Guidance of European banks, which might imply further capital issuance needs for some banks.

The results of the 2018 EBA stress test exercise will be announced this Friday, 2nd November. DBRS considers the 2018 adverse scenario included in the stress test to be in aggregate more severe than the one outlined in the 2016 exercise. In addition, DBRS notes that although there is no pass/fail threshold, results will be key to determining the Pillar 2 Guidance of European banks, which might imply further capital issuance needs for some banks.

Key Highlights:

A Tougher Adverse Scenario than in the 2016 stress test, but with Soft Sovereign Spread Assumptions
• The macro and market adverse scenarios for the EBA/SSM stress tests are more severe than the one conducted in 2016. However, the sovereign spread assumptions are less severe than DBRS expects in a scenario with increased political fragmentation (which is a shock included in the adverse scenario).

The 2018 EBA Stress Test & 2018 SSM Stress Test
• The EBA exercise includes 48 large banks and the results will be published. The SSM exercise includes the rest of the SSM Significant Instituions, and results will be confidential. In addition to that sample, the four main Greek banks also faced the same exercise with the EBA methodology, but their results were published on May 5, 2018.

Regulatory Implications: No Pass/Fail Thresholds but Affecting Capital Requirements
• Similar to the 2016 exercise, there is no pass/fail threshold, but results will be key to determining European capital requirements which might imply further capital issuance needs for some banks.
• The implications of the stress test for capital requirements will be considered in two ways. The determination of the Pillar 2 Requirement (P2R) will include a qualitative assessment in the element of risk governance based of the stress test results. In addition, the CET1 ratio depletion in the adverse scenario will be the starting point for determining the Pillar 2 Guidance (P2G). After that, the supervisor will make some adjustments.

The full commentary 2018 European Stress Test: What to Expect is available at www.dbrs.com