PART 1 EBA 2027 Stress Test: Experience is the key to success
This is Part 1 of our EBA 2027 Stress Test series. In Part 2, we will take a closer look at the practical challenges that may determine the success of the exercise from data quality and resource constraints to the ability to explain and defend methodological choices.
From submission to scrutiny
The 2027 EBA Stress Test will bring new data requirements, a dedicated climate risk module and a more streamlined framework. But the biggest challenge for banks may not be what is new. It may be what remains familiar: producing robust results, meeting demanding timelines and, above all, being able to explain and defend every material number when supervisors start asking questions. Submission of starting point data and submission of full data are critical milestones obviously, but the supervisory dialogue that follows, including questions, challenges and requests for clarification can be just as demanding and this is where experience becomes critical.
NFR Group can bring a practical perspective to banks preparing for the 2027 exercise. This means not only understanding the EBA methodology and templates, but also anticipating where questions, challenges or additional requests may arise as the exercise progresses.
In practice, this includes supporting banks with:
- Data quality, validation and consistency of the underlying data
- Interpretation and application of EBA templates and methodological requirements, including identifying potential issues or inconsistencies before submission
- Projection approaches and assumptions, and their consistency with the underlying data and methodology
- Preparation and review of explanatory notes, including the quality and credibility of the rationale provided for key assumptions and methodological choices
- Ongoing communication during the exercise between the institution and relevant supervisory teams, particularly where projections, assumptions or results require further clarification
- Preparation for the dedicated climate risk module, including requirements relating to transition and physical risk, data and modelling
The value of this perspective is not simply knowing what the methodology says. It is helping banks navigate the published methodology, understand what it means for their preparations, focus on the areas that matter most, and prepare effectively for the exercise.
What is different in 2027?
The 2027 stress test has been designed with simplification in mind. One of the most significant changes is a substantial reduction in data requirements, with the EBA indicating a reduction of around 55% in the number of requested data points compared with previous exercises. The intention is to reduce the burden on banks while maintaining the robustness and comparability of the exercise. Greater use of harmonized supervisory reporting is another important element of the new approach.
The 2027 exercise introduces a dedicated climate risk module covering both transition and physical risks, with a focus on their impact on credit risk. Under the current draft methodology, the climate risk module is standalone and does not affect the core CET1 stress-test result.
Credit and market risk frameworks have also been updated, with revised credit risk templates and greater alignment of market risk projections with the CRR3/FRTB framework.
Less data changes the nature of the data challenge
As stress-test data becomes more closely linked to supervisory reporting, data lineage, consistency and explainability become even more important. The 2027 framework’s greater reliance on harmonized supervisory reporting should help reduce unnecessary data collection. But it also increases the importance of having a strong understanding of the underlying data architecture and lineage. Data quality should therefore be treated as a core part of stress-test preparedness, not as a final quality-control exercise immediately before submission.
Is climate risk integration really the biggest challenge?
Climate risk is undoubtedly one of the most important new elements of the 2027 exercise. The dedicated climate risk module covers both transition and physical risks, requiring banks to work with new data, analytical approaches and modelling assumptions. This will place additional demands on climate risk expertise, data availability and modelling capabilities.
EBA itself describes the climate module as a major innovation of the 2027 exercise. However, the results of the climate module will not affect the headline solvency or capital depletion results in the 2027 exercise. EBA has also described the integration of climate risk as a gradual process, with further integration expected in future stress tests. Climate risk therefore deserves significant attention, but it may not ultimately be the factor that determines whether a bank succeeds or struggles in the core stress-test exercise.
The 2027 climate module is essentially a climate-adjusted credit risk stress test. Banks must take the transition and flood shocks provided, apply them on top of the adverse macroeconomic scenario, translate them into changes in PD and LGD using their internal modelling frameworks, and calculate the resulting additional credit losses and provisions.
For banks, one of the biggest challenges will be the availability and quality of climate-related data. Equally important will be the ability to translate climate variables into credit risk parameters and demonstrate that the selected transmission channels and modelling assumptions are credible, well-founded and appropriately documented. This will be particularly important in the explanatory notes, where banks are expected to explain and justify their methodological choices and how climate-related factors are reflected in their credit risk estimates.