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Key Assumptions Shape European Bank Stress Test Results 

August 3, 2016

Fitch via Reuters

Results of the bank stress test published by the European Banking Authority (EBA) on 29 July uncovered no real surprises but highlighted that a handful of assumptions are key to determining how banks' capital holds up under the stress scenarios, says Fitch Ratings.

A preliminary analysis of the EBA data shows that, in addition to stress assumptions around credit risk, a bank's conduct track record, the extent to which it is involved in trading activities and the hedging strategy it applies to interest-rate risk in its banking book are factors which resulted in capital adequacy erosion under the stress assumptions applied.

Credit risk stresses are influenced heavily by macroeconomic assumptions about a bank's home country, the composition of its loan book, and the extent of already defaulted loans. A common baseline, stressed macroeconomic scenarios and risk-specific shocks covering the period 2016-2018 were applied to the 51 banks included in the EBA stress sample. The macroeconomic adverse scenarios and risk-specific shocks linked to the scenario were developed by the European Systemic Risk Board and the ECB, in close collaboration with national regulators. Read more

 
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