EU Banks Proved Resilient in the 2023 EBA Stress Test

This commentary discusses the results of the European Banking Authority 2023 Stress Test that were published on 28th July. Key highlights include:

Results showed that in the adverse scenario 2 banks out of 70 failed marginally to meet their minimum Tier 1 TSCR with a maximum capital shortfall of just 17 bps of capital; and 3 banks breached the minimum leverage threshold with a maximum shortfall of 12 bps. 

Despite the severity of some of the assumptions in the adverse scenario, EU banks showed lower capital depletion in the 2023 stress test than in previous exercises, which we largely attribute to a stronger and healthier starting point for banks' profitability and asset quality.

Despite the lower capital depletion in the 2023 Stress Test, overall capital cushions over minimum requirements were lower compared to the 2021 Stress Test. However, this was the result of higher minimum requirements in 2023 than 2021.

"We believe that results are positive as the breaches in the TSCR and leverage ratio are very small and would be relatively simple to remediate" notes Pablo Manzano, Vice President, Global FIG at DBRS Morningstar. "This stress test provides higher quality data than previous ones that will improve the calculation of the SREP and PG2 for each bank. Nevertheless, we do not expect material changes to SREP requirements" notes María Jesús Parra, Vice President, Global FIG at DBRS Morningstar.