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EBA to use IFRS 9 rules in 2018 EU-wide stress test

The European Banking Authority on June 7 published the draft methodology for its 2018 EU-wide bank stress test for public consultation.

Among other elements, the 2018 stress test will include a requirement for banks adopting the new IFRS 9 accounting standard in 2018 to use the method in both their starting-point data and their projections. The test will also disallow the incorporation into the test results of any sale or other capital transaction not completed before Dec. 31, 2017, Reuters noted June 7.

The test will cover 49 EU banks representing more than 70% of the EU banking sector. Of the 49, 35 are under the jurisdiction of the ECB's Single Supervisory Mechanism.

"People briefed on the situation" told the Financial Times on June 7 that the EBA had had to revise the list of banks to be tested after the announcement earlier in the day that Banco Santander SA would take over ailing rival Banco Popular Español SA. The pair will be tested as a joint entity provided the deal completes by year-end, the report noted.

Also excluded from the 49-bank list is Banca Monte dei Paschi di Siena SpA, which is in the process of restructuring and is due to receive a significant injection of state funding. The EBA said it was up to supervisory authorities to decide which banks are included, and "people briefed on the matter" told the FT that the ECB had decided to leave out Monte dei Paschi.

As in previous EBA stress tests, there is no pass/fail capital threshold, with banks to be assessed against relevant supervisory capital ratios under a static balance sheet. The results will be used, however, to inform the Supervisory Review and Evaluation Process, or SREP, which allows regulators to set bank-specific capital add-ons.

The test will assess the resilience of EU banks against a macroeconomic baseline and adverse scenario based on their balance sheets at the end of 2017 over a period of three years.

Similar to the 2016 stress test, the 2018 exercise focuses on assessing the impact of risk drivers on banks' solvency. Additionally, banks will be required to project the effect of the scenarios on net interest income and to stress profit and loss and capital items not covered by other risk types.

The final methodology will be published as the exercise is launched, at the beginning of 2018, while the results will be published in mid-2018.