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The EU-wide stress tests of EBA/SSM: necessity and guarantee for a resilient banking sector?: some introductory remarks

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Donderdag 10/3/2022
Swyngedouw / Ben Hadj

The purpose of a stress test for banks is straightforward: determine how much capital is required by a bank to navigate through a financial storm and continue to provide financing to the economy. The first EU-wide stress test was conducted in 2009 in the aftermath of the global financial crisis to restore confidence and has become since then an integral part of the supervisors’ toolbox. It helps assess financial vulnerabilities and provide market participants with comparable information. Thanks to the interaction with the supervisor, the stress test encourages banks to think about their own vulnerabilities and their exposure to tail events. The results feed directly into capital requirement given that stress tests are the main input to determine the pillar two guidance (P2G). In the future, supervisory stress tests might move towards a more extensive use of gradual data to increase efficiency and realism. The scope of the exercise should also be enlarged to cover climate risk in addition to the more traditional financial risks.