These tests have tended to assess the strength of institutions in individual jurisdictions, although typically including their consolidated balance sheets worldwide. The only coordinated multi-country tests have been the recent exercises in the European Union. More recently, the European Banking Authority started the process of its 2018 stress testing of Europe’s largest banks when it published its draft stress-test methodology.
This test will again look at the effect of macroeconomic stress on a bank’s viability, taking into account market risk and litigation risk. It will, however, be much tougher than previous tests, as it will include the International Financial Reporting Standard (IFRS) 9, which requires that banks model credit risk losses for loans even before they have defaulted.