EU-Wide Stress Test: Methodology

Javier De Diego and Benjamin Friedrich

This chapter aims to summarise the main methodological aspects involved in a supervisory bottom-up stress-testing exercise. Any stress-test exercise faces similar methodological issues, and the objective is to shed light on choices that can be made in the design of the methodology. However, the 2014 EU-wide stress test will be used as a primary reference in order to illustrate a methodological framework. This third pan-European exercise (after 2010¹¹See http://www.eba.europa.eu/risk-analysis-and-data/eu-wide-stress-testing/2010. and 2011²²See http://www.eba.europa.eu/risk-analysis-and-data/eu-wide-stress-testing/2011.) was set to assess the resilience of EU banks to adverse economic developments, and was coordinated by the European Banking Authority (EBA) and carried out in cooperation with the European Central Bank (ECB), the European Systemic Risk Board (ESRB), the European Commission and the competent authorities from all relevant national jurisdictions. The underlying methodological approach was laid out in the methodological note³³See https://www.eba.europa.eu/-/eba-publishes-common-methodology-and-scenario-for-2014-eu-banks-stress-test">for-2014-eu-banks-stress-test, publish