Banks relieved as EBA punts on dual-track stress tests
European banks breathed a sigh of relief last month after the European Banking Authority backed away from a long-mooted split structure for its 2023 stress tests, opting instead for a hybrid approach.
Reforms proposed by the EBA in 2020 would have divided the biennial stress test into two parts: a bottom-up leg, where banks use internal models to gauge how they would perform in pre-set stress scenarios; and a top-down leg, where supervisory models are used to assess these same shocks. The results of the top-down leg would then be used to set non-binding capital add-ons, known as Pillar 2 guidance (P2G).
Banks complained this dual-track approach would increase their workload and put them in the difficult position of having to explain differences between the two sets of results to stakeholders and investors.
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