by Richard Whiting, Client Partner at specialist analytics consultancy 4most
The European Banking Authority’s (EBA) Stress Test 2025 will evaluate the resilience of EU banks as they navigate a number of changes against the backdrop of an evolving regulatory landscape. A central focus will be the Capital Requirements Regulation III (CRR3), which introduces new challenges such as revised exposure classifications, changes in risk weights and the output floor. Although the new requirements are complex, thorough preparation and strategic planning will pave the way for success.
Key changes
The 2025 EU-wide stress test presents a number of challenges that banks must prepare for, especially the introduction of CRR3. A key part of this is the dual reporting obligation, with banks now required to submit starting values under both CRR2 and CRR3.
Additionally, 2025–2027 projections must comply with the new CRR3 standards. However, banks will continue to operate under the current requirements for market risk rules, as the rollout of CRR3 in this area has been delayed.
Banks should also be aware that they will no longer calculate their own net interest income (NII) projections. They will be provided during this exercise which, given the relevance of NII, could significantly affect the results of the stress test.
On credit risk, significant updates include revised exposure classifications under CRR3 and increased requirements for country-sector combinations, with minimum coverage rising from 70% to 80%. This change will extend the scope to previously immaterial segments of the portfolio.
Significant changes creating concern among banks
Banks are facing a sizeable challenge not only in complying with CRR3, but also in meeting the broader demands of the stress test.
The dual reporting requirement means that banks must decide if their current systems are fit for purpose. In other words, can they report starting values under both CRR2 and CRR3? Even if the answer is yes, processes and models will need to be revised to handle reporting projections for 2025-2027 under CRR3.
Banks are also being made to think about NII projections and the new calculation methodology provided by the European Central Bank (ECB). Banks may be concerned about the inability to generate their own NII projections, which fuels uncertainty about potential impacts and the practical workings of the process.
In the absence of absolute clarity on how information will be exchanged, banks are still unsure on what exactly to expect and how to prepare.
With the January deadline fast approaching, banks are still working on CRR3 implementation, leaving resources and operational capacity strained. To support banks in this transition, the EBA has organised workshops to address the challenges they are facing, including those surrounding CRR3 implementation. The EBA has already proven it is willing to listen to concerns by delaying the first regulatory reporting under CRR3 by six weeks to the end of June 2025.
The path to success
Diligent preparation by banks should encompass a number of key steps to improve readiness and ultimately ensure effective compliance.
“Practice makes perfect” is a relevant adage in this context, as conducting a thorough dry-run exercise is essential for banks to validate their readiness for the exercise, especially with the dual reporting requirement in mind.
A valuable dry-run could include testing whether models and systems can produce required outputs, assessing intuitiveness of results, reviewing the NII calculations and the ability to fill all the required templates. By analysing the outcomes of these exercises in detail, banks can pinpoint vulnerabilities and address them accordingly.
After reviewing the EBA’s methodological note and pinpointing vulnerabilities through dry-runs, stress test models should then be updated to address any gaps. Internal teams, particularly model validation departments, will need to be on hand to confirm the suitability of new models.
Banks should also develop a resource plan to ensure that sufficient resources are allocated in the right places. Inevitably, the workload ahead of next year’s exercise is greater with the implementation of CRR3, so any plan must account for this and insights taken from dry-run exercises.
While the 2025 stress test is a considerable challenge to navigate, it also offers an opportunity for banks to showcase effective resilience.
With strategic planning, early identification of existing gaps, and considered resource allocation, banks can meet the challenges ahead with confidence and position themselves for success.
