The latest bank stress test by the European Banking Authority (EBA) should have been more demanding in testing banks’ resilience to systemic risks across the EU, according to a new report by the European Court of Auditors. The simulated shocks were actually milder than those experienced during the 2008 financial crisis and the adverse scenario used did not appropriately reflect all relevant systemic risks to the EU financial system, say the auditors. In addition, when designing and carrying out the test, the EBA relied heavily on national supervisors, but lacked resources and could not oversee them effectively.
Since 2011, the EBA has run the EU-wide stress tests to assess banks’ resilience to shocks such as a severe recession, stock-market crash or a loss of confidence. The auditors examined whether the 2018 test was fit for purpose. They looked at criteria for selecting banks and the process for identifying risks.
“European banks should have been tested against more severe financial shocks,” said Neven Mates, the Member of the European Court of Auditors responsible for the report. “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.”