Adam Farkas: Other supervisory instruments – The Stress Test 2018


Adam Farkas, EBA

At last year’s Handelsblatt Conference “European Banking Regulation” (22-24 November 2017 in Frankfurt Germany), Adam Farkas (Executive Director, European Banking Authority – EBA) spoke about the outlook on the Stress Test 2018.

IFRS 9

In late 2017 the EBA published the final methodology for the EU-wide stress test in 2018. The methodology included all relevant risk areas (credit risk including securitisation, market risk, operational risk, including behavioral risk). In addition, the effect of the stress scenarios were to be projected on the net interest income. For the first time, the stress test incorporated IFRS 9 accounting. The results were first to be admitted to the EBA in early June 2018.
The final results will be released at the end of October 2018.

Similar to 2016, the EU-wide stress test will focuses primarily on assessing the impact of risk drivers on bank solvency. As in 2016, the methodology is again based on the assumption of a static balance sheet. This is very restrictive and unrealistic. Adam Farkas wished there were enough resources for an assumption of a dynamic balance sheet. He elaborated on the changes in the methodology. In addition to the challenge posed by the inclusion of expected credit losses through IFRS 9, changes have been reported in other areas of risk. In the market risk area, for example, an adverse scenario instead of three must be used now. There is also a cap on the projected net interest income.

Adam Farkas emphasised that he is not pursuing the goal of failing a bank or letting it pass. There is no specific threshold for it. The scenarios are very adversive, but plausible. The stress test is not only useful for the regulation. Banks should use the results for their management.

Adam Farkas is already confirmed as a speaker for this year’s Handelsblatt Conference “European Banking Regulation” on 19-21 November 2018 in Frankfurt, Germany.

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