The results of the European Banking Authority’s (EBA) stress test, administered to banks
across 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 exposures to non-performing loans (NPLs) and to governments and
corporates seem 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
intriguing exercise with a longer horizon (say, five or ten years instead of three) and
multiple scenarios would be recommended