With the publication of the final methodology of the EU-wide stress test 2021 and the associated templates including draft guidelines, the European Banking Authority (EBA) has defined the methodological basis for the stress test in 2021. It is now up to the participating banks to understand the methodology, analyze the data requirements and identify possible gaps before the operational implementation of the stress test in January 2021.
Which methodological changes should be considered?
Due to the COVID-19-related postponement of the EBA stress test 2020, one could have assumed that the supervisory authority would base the exercise on the existing methodology and templates. However, as already suspected in our blog post EBA/ECB Stress Test 2021: postponed but not abandoned, some methodological innovations have been included.
Compared to the method of the postponed EBA stress test 2020, there are changes especially in the area of credit risk – mainly influenced by COVID-19 effects. Thus, moratoria and moratoria without legal form according to EBA/GL/2020/02 (see also our article on the PwC Risk Blog) have to be reported in the new EBA stress test template „COVID-19 Moratoria and Public Guarantees“. The moratoria must not be taken into account in the calculation of the projections for the credit risk exposure amounts („REA“) and impairments. Therefore, banks must consider and make assumptions about how the credit risk amount and impairments would have developed if any moratoria expired on 31 December 2020.
In this context, a significant change with regard to the supervisory view on IFRS 9 requirements must be mentioned. The CRR quick-fix (Regulation (EU) 2020/873) introduced transitional arrangements to mitigate the COVID-19 effects on regulatory own funds. This allows banks making use of the transitional provisions to exclude from their own funds calculation any increase in provisions for stage 1 and stage 2 exposures that happened after 1 January 2020. The exclusion is limited with regard to the time (until 2024) and amount but allows a full exclusion of these effects in 2021. The relief thus has a direct impact on non-defaulted portfolios over the projection period of the stress test. Banks applying nGAAP, on the other hand, cannot benefit from the regulations.
What is missing so far are any hints on how the macroeconomic scenario will look like. Here, the challenge will be to create a meaningful stress scenario based on the stressed circumstances most banks find themselves within already.
Which milestones are relevant for banks?
The EBA stress test exercise starts in January 2021 and will be completed by the end of July 2021. Important milestones are shown in the figure below:
How can PwC support you?
PwC has supported banks during the EBA / ECB stress test since 2014 in all European countries. PwC is a strong partner who understands the challenges banks face when conducting the EBA stress test and offers suited solutions. From know-how, best practices and tools up to Q&A and data – with PwC you will master the exercise even in stressful times.
Additionally, PwC is experienced in delivering high-quality results during volatile conditions. No matter whether it is on-site or from remote, our work and team setting is founded on agile and dynamic structures. In line with that, we come along with the right tools to support you within uncertain times and we provide you with on-demand resources to stabilize your infrastructure if COVID-19 measures take place.