This year banks under the direct supervision of the SSM are required to perform a stress test exercise to evaluate the impact on profits and capital of a hypothetical adverse scenario set out by the EBA/ESRB and that covers three years.
The adverse scenario is more severe than the one outlined in 2016, when the previous EU-wide stress test was conducted. It is possible to evaluate the severity of the EBA adverse scenario by comparing it with the central path of the stochastic distribution of the Prometeia model that identifies a scenario corresponding to the 50th percentile of the distribution.
This analysis confirms that, for some key variables such as GDP and long term interest rates, the adverse scenario is more severe now than in 2016.
Although it is too early to assess the impact of the exercise on bank capital, given that the test will run on IFRS9 compliant data that are not yet available, a few considerations could help shed some light on the possible outcome for Italian banks.
As Italian banks face this round of stress tests with a stronger capital position, improved asset quality and a lower probability of loan default than two years ago, and given that the new methodology might not be, on balance, more severe than last time, banks’ capital ratios should remain above the regulatory minimum even in the adverse scenario.
The paper is also available on Risk.net's Library.