A bird’s-eye view of the resilience of the European banking system: results from the new macroprudential stress test framework

The macroprudential stress test of the euro area banking system examines the effects of the baseline and adverse scenarios on the 91 largest euro area credit institutions across 19 countries. The analysis looks at the financial system as a whole and acknowledges the interdependencies between banks and the real economy. In particular, it takes into account banks’ reaction to changing economic conditions and to deterioration in their balance sheets. The results indicate substantial resilience of the euro area banking system at the current juncture. The macroprudential stress test predicts a lower negative impact on capital ratios, though higher capital depletion, in billions of euro, than a static balance-sheet stress test. It also shows that banks’ deleveraging tied to deteriorating capitalisation and asset quality leads to further deterioration in economic conditions in an adverse scenario. JEL Classification: E37, E58, G21, G28