By Olivier Salomé, Spiros Bourmbos and Loïc Vanherck

At the moment, EU-wide and US supervisory stress tests* are taking place.  They are being led by the European Banking Authority (EBA) and the Federal Reserve Board (FED), respectively.  Both stress tests aim at assessing banks’ resilience to different hypothetical shocks however, it is only the larger banks that are participating.  

The EU-wide stress tests cover a sample of 51 banks assessing about 70% of the EU banks total assets; the US stress tests include 33 bank holding companies (BHCs) with $50 billion or more in total consolidated assets.

While the objectives of these stress tests are broadly similar, it remains less clear the extent to which each scenario is comparable.  The purpose of this blog is to provide some insights into the comparison of the macro- economic scenarios provided by the EBA versus FED.

One of the differences that can be easily identified between the US and the EU-wide stress test is the fact that the FED releases three scenarios, baseline, adverse, severely adverse, while the EBA release only two scenarios, baseline and adverse.  Furthermore, the FED requires that the BHCs provide an internal baseline scenario and, at least, one internal stressed scenario.  These additional internal scenarios are not in the scope of the EU-wide stress tests.  The FED approach is more complete than the European one: the two supervisory stress scenarios assess the sensitivity of profitability and risks to the severity of given scenarios whereas internal scenarios complete this view by addressing the specific vulnerabilities of each bank.

The European and US scenarios are materialized by a series of aggregated macro-economic indicators such as the GDP, short term interest rates, unemployment rate, inflation rate, residential and commercial property prices.  In total, the FED publish the projections for 28 indicators with a clear economic narrative, and a comparison with last year’s scenario.  In contrast, the EBA does not provide explicitly, the projected values for all the indicators and each scenario is derived from four broad systemic risks threatening the EU financial stability. All of this information combined may give more room to the banks when it comes to their interpretation of the scenarios, hence a potential lack of comparability of the results. 

Real GDP growth in Europe

Let us now look at the comparison of the projected values for one key macro-economic indicator: real GDP growth in Europe.  

The EBA baseline is actually more optimistic than the one provided by the FED over the same period.We observe some dissimilarities even under the baseline (see Figure 1) although it is supposed to reflect a normal forecast for the period 2016-2018**.


Relative shocks on real GDP growth in Europe

We can also observe that the relative shocks (adverse/baseline) applied on these forecasts do not have the same magnitude (see Figure 2).

The FED applies a sharp shock, such as the 2008 crisis, followed by a rapid recovery while the EBA considers a weaker shock which lasts longer. 

This demonstrates the difference in vision regarding the European economies. 


CCAR: Comprehensive Capital Analysis and Review

** The baseline is provided by the European Commission for the EU-wide stress test. The baseline of the CCAR are not forecasts of the Federal Reserve but follow a similar profile to the average projections from a survey of economic forecasters.

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