The EBA starts dialogue with the banking industry on 2025 EU-wide stress test methodology

The European Banking Authority (EBA) has today published for informal consultation its draft methodology, templates, and guidance for the 2025 EU-wide stress test. This step marks the beginning of the dialogue with the banking industry and builds upon the methodology used in the 2023 exercise, with improvements reflecting new insights and regulatory changes. Some important changes are introduced, notably the integration of the upcoming Capital Requirements Regulation (CRR3), set to be implemented on January 1, 2025. It also considers the Commission’s announcement to postpone the application date of the fundamental review of the trading book (FRTB). Other enhancements include the centralisation of net interest income (NII) projections and advancements in the market risk methodology to increase risk sensitivity. 68 banks from the EU and Norway, including 54 from the euro area, will participate in the exercise, thus covering 75% of the EU banking sector. The expanded geographical reach and incorporation of proportionality features aim to boost efficiency while ensuring the relevance and transparency of the results.

This forward-looking exercise will assess the resilience of EU banks in the face of adverse economic conditions, providing essential data for the 2025 Supervisory Review and Evaluation Process (SREP). The EBA will maintain a primarily constrained bottom-up approach, complemented by supervisory top-down models that will offer net fee and commission income projections, as well as the newly centralised NII projections to the participating banks. The methodology will further leverage on the breakdown of credit risk by sector of economic activity.

The introduction of CRR3 into the methodology means that risk exposure amount (REA) will need to be restated for the risk areas, while the output floor will be computed on the total REA. Considering the Commission's announcement to postpone the implementation of the CRR3 market risk rules (FRTB) until January 1, 2026, the EBA has adjusted the draft methodology to align with the current market risk REA regulations, effective as of the start date of the exercise. The EBA remains prepared to update this methodology to accommodate any further information or changes following the adoption of Commissions’ Delegated Act.

Proportionality will be emphasised for smaller and less complex banks to promote efficiency and transparency. Instead of a single capital threshold, banks will be evaluated against the relevant supervisory capital ratios within a static balance sheet assumption. The results from the stress test will play a crucial role in informing the SREP, thereby influencing decisions on bank capital resources and future capital planning.

The EBA has also focused on aligning the process with the needs of banks and supervisors by considering adjustments to submission dates and the banks' FAQ process, to accommodate the transition to CRR3.

The EBA expects to publish the final methodology at the end of 2024, launch the exercise in January 2025 and release the results by the end of July 2025.

Notes for editors

1. The EU-wide stress test is designed to provide a common analytical approach to evaluate the stability of EU banks and the wider banking system when subjected to economic stress, challenging their capital adequacy.
2. The 2025 EU-wide stress test is coordinated by the EBA, working in conjunction with the European Systemic Risk Board (ESRB), Competent Authorities, including the Single Supervisory Mechanism (SSM), and the European Central Bank (ECB). The EBA's Board of Supervisors will finalise scenarios, methodologies, quality assurance practices, templates, and guidelines, in coordination with the ESRB and ECB who will develop the adverse macroeconomic scenario and associated risk parameters.
3. The preliminary methodology and templates are now open for informal discussion with banks, allowing for input that will be considered in finalising these documents.
4. Annex I of the methodological note contains a preliminary list of institutions included in the sample. To account for potential exclusions prior to the launch of the exercise, three euro area banks have been provisionally added to the sample. If no changes to the sample occur by mid-December, these banks will be automatically excluded.