The newly created European Banking Authority (EBA) has announced that new stress tests will take place (source: [1] EBA internet site).

Now that the irish, greek and other southern countries crisis has break out, the results will give interesting insights on EU banks resiliency as well as the methodology used and the effectiveness of such stress-tests. I hope that besides the quantitative results, the EBA will publish on the methodology used in particular regarding how the Euro zone financial situation, and specific countries situations are taken into account in such stress tests. There is no straightforward answer, which makes any hint all the more interesting.

How to build a stress test in the new banking environment is a very important question on which I have no definitive answer. Any advice or suggestion welcome.

EBA announcement:

The EBA announced a new round of stress tests
The EBA Board of Supervisors agreed yesterday on a strategic work plan for an EU-wide stress test to take place in the first half of 2011 and to publish results in mid-2011.

The 2011 stress test will be carried out in cooperation with the national supervisory authorities, the European Systemic Risk Board (ESRB), the European Central Bank (ECB) and the European Commission, and will cover a broadly similar group of banks as last year.

The methodology and approach taken will build on that used in the 2010 stress test.  The results will be subject to a stringent review and quality control process.
 

The objective of the stress test is to assess the resilience of the EU banking system to hypothetical stress events under certain restrictive conditions. The stress test is one of a range of supervisory tools for assessing the strength of individual institutions as well as the overall resilience of the system.

This stress test is a part of the framework for the assessment of the resilience of the financial sector being built by the European System of Financial Supervision (ESFS) and will be carried out in parallel with stress tests undertaken by the European Insurance and Occupational Pensions Authority (EIOPA).

The EBA announced future assessment of liquidity risk
The EBA will, as part of its regular cycle of risk assessments, initiate a separate thematic review of liquidity funding risks across the EU banking sector in the first quarter of 2011. The EBA will use this internal review to inform supervisory authorities about areas of vulnerability in relation to liquidity risk.