The EBA EU-wide Stress Test 2016: Deciphering the black box

Key Points The results of the European Banking Authority’s (EBA) stress test, administered to banks throughout the EU and published at the end of July 2016, revealed some large differences across banks. Our analysis of the results for the 51 banking groups suggests that not economic growth but rather the exposure to non-performing loans (NPLs) and to governments and corporates seems to be the main drivers behind the impact of the adverse scenario. This implies that the stress tests are primarily responding to the risks that have already materialised. They are therefore useful for understanding the implications of the currently identified risks, but they do not necessarily give insights into the fundamental soundness of the European banking sector. Policy Recommendation If well-executed, the stress test can be a useful tool for acquiring a better understanding of the implications of the current issues facing European banks. It does not, however, give insights into the fundamental soundness of the European banking sector, which is widely considered to be one of the main objectives of the stress test. To obtain such insights, a more comprehensive exercise with a longer horizon (say, five or ten years instead of three) and multiple scenarios would be recommended.