The banking industry will face a “perfect storm” from the beginning of 2025 with the next, stricter stress tests that the European Banking Authority (EBA) will carry out together with the European Central Bank.
“The European Banking Authority published the draft rules for the 2025 stress test on July 5, 2024, giving the go-ahead for banks to prepare in order to meet the new requirements,” market representatives explained to “Naftemporiki” and added: “The draft will be discussed with representatives of the banks before the final form is published at the end of the year, but it was based on last year’s requirements. Based on these requirements, EBA looked for weak points and, as in the previous stress tests, sought the greatest possible transparency for the supervisory authorities. For banks, this often leads to increased data requirements while simultaneously reducing degrees of freedom.
Every two years
“The banking sector has been subjected to a stress test every two years since 2010, so that the supervisory authorities can check the balance sheets of European banks, identify and resolve possible weaknesses,” the same sources noted and explained: “Next year there will be a new methodology while updated and more complex rules will be applied.”
The EBA’s 2025 Stress Tests will start in January 2025, alongside the implementation date of the third capital requirements regulation (CRR3) and the update of the Supervisory Review and Evaluation Process (SREP) by the ECB’s Supervisory Board. In this context, “significant potential risks of the credit institution should be assessed, with the aim of creating simpler, shorter and more flexible supervisory procedures.”
According to the same sources, “the main innovation of the 2025 stress tests is the examination of the third capital adequacy regulation (CRR3), which will be implemented from January 1, 2025. The new requirements for the calculation of risk weighted assets (RWA), credit valuation adjustment (CVA) and operational risks, must be incorporated into the provisions from the beginning.”
New methods for solvency calculation
After the initial draft of the stress test, the European Banking Authority adjusts the details and corrects mistakes. “However, there have never been any fundamental changes to the original EBA draft and no significant changes are expected this time either.”
According to the same sources, banks will have to adopt some additional or new methods to calculate their solvency. “The impact on capital requirements will vary significantly depending on bank portfolio structures and the methods used to calculate capital requirements. It will take into account an aggregated ‘minimum capital’ (output floor), which will ensure that banks’ risk-weighted assets (RWA) generated by internal models will not be lower than 72.5% of RWAs. This will apply regardless of whether the bank’s internal models allow it to accumulate less money because it has proven to the regulator that it has a lower risk profile.”
Raising additional funds
In practice, this means that banks may need to raise additional capital to comply with the new regulatory requirements.
“The ECB has announced that it will update its supervisory review and assessment process to make it “more effective and efficient” and to adapt it to the changing environment, with rapidly evolving geopolitical, macroeconomic, climate or cyber risks.”
The ECB has not yet elaborated on the updated process, but has announced that the tests “will be shorter and closer to real-time supervision,” focusing on key risks and encouraging the adoption of dynamic measures.
