October 31, 2018 / 2:03 PM / 15 days ago

FACTBOX-EU tests resilience of top banks

Oct 31 (Reuters) - The European Banking Authority (EBA) publishes the results of its biennial stress test of top banks to check if they hold enough capital to withstand major market shocks without needing public help.

The following are the main elements of the test:

* Results published at 1700 GMT on Nov 2.

* Toughest since the test was introduced in 2009 during the financial crisis. Theoretical scenarios include shocks like a no-deal Brexit and the European economy shrinking cumulatively by over 8 percent by 2020.

* Test based on balance sheets at the end of 2017 and how the theoretical market shocks affect capital holdings over three years to 2020.

* No formal pass or fail threshold, but banks failing to hold a core capital to risk-weighted assets ratio of 5.5 percent in an adverse scenario could have to raise more capital or sell risky assets. No bank is expected to dip below that threshold, so investor attention will be focused on laggards.

* Although the capital ratios used by regulators are transitional, analysts say market participants are likely to focus on the so-called fully-loaded ratios, which take into account all new capital rules approved since the financial crisis, even if they have yet to be fully implemented.

* Analysts expect average hit of about 380-400 basis points to core capital across banks in the “adverse” or toughest of two scenarios, in line with the impact of the same test in 2016.

* Hit to capital expected to be mitigated by banks starting out with generally higher capital levels than in prior test.

* Banks with a troubled history like Italy’s Monte dei Paschi and Spain’s Bankia are not among the 48 lenders tested, nor are there banks from weaker financial systems like Greece and Portugal. Thirty-three of the banks tested are in the euro zone.

* The European Central Bank is testing a further 60 smaller lenders with a lighter version of the EBA scenarios in some cases. Results of those tests will not be published.

* The EBA test simulates four shocks happening at once: abrupt repricing of risk premiums; combination of weak banking profitability and low economic growth; concerns around sustainability of public and private debt combined with political uncertainty; liquidity risks in non-bank financial sector hitting the broader financial system.

* Analysts say the adverse scenario’s assumptions in terms of rising government bond yields are relatively soft compared to what has actually been happening on bond markets in the past few months, especially in Italy.

* The test applies new IFRS 9 accounting rule that took effect in January 2018 to increase loan-loss provisions that banks must assume, which could amplify negative effects in the first year of the test scenario. (Reporting by Huw Jones in London; Editing by Catherine Evans)

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