An EU-wide banking stress tests audit has found that stress tests administered by the European Banking Authority (EBA) pay insufficient attention to systemic risk.
The review conducted by the European Court of Auditors examined the efficacy of the EBA’s stress tests, which have been conducted regularly since 2011 with the aim of determining the resilience of the EU’s banks. The banking stress tests audit found that the most recent test, conducted in 2018 on 48 banks in 15 EU Member States, imposed simulated shocks which were significantly less impactful than the real world shocks experienced by banks during the 2008 financial crisis. Additionally, the 2018 stress test deployed ‘less severe adverse scenarios’ in Member States whose economies and financial systems were more vulnerable; while banks determined to be particularly vulnerable to risk were excluded altogether from testing protocols.
Neven Mates, the Member of the European Court of Auditors responsible for the report, said: “European banks should have been tested against more severe financial shocks. Moreover, key decisions at the EBA are taken by representatives of national supervisors and an EU-wide perspective was not sufficiently taken into account in the way the test was designed and conducted.”
Due in part to a limited range of available resources, the EBA was almost entirely reliant on reports from national supervisors and the European Central Bank (ECB) to determine the results of its tests, the banking stress tests audit found. The veracity of the 2018 test suffered further due to the fact that it was designed primarily by the ECB and national banking authorities, rather than independent bodies or risk management experts. The auditors recommended the European Commission review the governance policies of the EBA and increase the resources available to it; and that the EBA take on a greater supervisory role when developing future stress tests.