Finance Watch statement on EBA EU-wide stress test results

On 28 July at 18:00 CEST, the European Banking Authority (EBA) published the results of the 2023 EU-wide stress test. This stress test covers a sample of 70 banks, accounting for around 75% of the total assets of EU banks. The goal of the EU-wide stress test is to help assess the resilience of the European banking sector and the results feed into banks’ future capital charges. The results show that European banks remain resilient under an adverse scenario combining a severe EU and global recession, increasing interest rates and higher credit spreads.

Finance Watch welcomes the findings regarding the resilience of the banking sector overall, but calls for a cautious interpretation of the results. As the EBA and European Central Bank (ECB) noted, the stress test is not a pass-or-fail exercise and supervisors need to look carefully at the vulnerabilities the 2023 stress test has identified. In particular, vulnerabilities relating to leverage loan and real estate portfolios, as well a growing number of impaired and defaulted loans in the adverse scenario. While only three banks dropped below a minimum capital threshold in the adverse scenario, the number of banks that would face restrictions on distributions is much higher (21, 29 and 37 at the end of 2023, 2024 and 2025 respectively), which is due to the breach of the Maximum Distributable Amount (MDA) threshold. Further, the supervisors noted that in order for them to better project sector-specific losses, banks need to improve modelling and risk data aggregation capabilities. Finally, Finance Watch argues that as the impact of the sustainable transition on banks is not included in this analysis, conclusions about the resilience of the banking sector for the coming years cannot be drawn.

Julia Symon, Head of Research & Advocacy at Finance Watch, said:

“The EBA’s stress test scenarios do not account for the sustainable transition and the sectoral transformation that will be required in the coming years to meet the EU’s climate objectives. Climate scenario analyses are currently run separately by the EU supervisors.

As the sustainable transition will have a major impact on the world economy and the financial system – including bank resilience – it’s very important to interpret the results of the 2023 EU-wide stress test with caution”.

To arrange an interview with Julia Symon, Head of Research & Advocacy at Finance Watch, please contact Alison Burns at alison.burns@finance-watch.org or call on +32 (0)471577233

About Finance Watch

Finance Watch is an independently funded public interest association dedicated to making finance work for the good of society. Its mission is to strengthen the voice of society in the reform of financial regulation by conducting advocacy and presenting public interest arguments to lawmakers and the public. Finance Watch’s members include consumer groups, housing associations, trade unions, NGOs, financial experts, academics and other civil society groups that collectively represent a large number of European citizens. Finance Watch’s founding principles state that finance is essential for society in bringing capital to productive use in a transparent and sustainable manner, but that the legitimate pursuit of private interests by the financial industry should not be conducted to the detriment of society.

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