Banks face ‘toughest’ stress tests yet

European Union officials are preparing to pit the bloc’s banks against the toughest simulated recession that they have ever faced in a stress test, three people briefed on the matter said.

The European Banking Authority (EBA) and the European Central Bank (ECB) will next week unveil an adverse scenario for the stress tests, which start in May, that assumes the 28-nation bloc’s economy undershoots EU growth forecasts by a greater margin than in the exams held in 2010 and 2011, said the people, who declined to be named as the details aren’t yet public. Those previous tests were criticised for failing to uncover weaknesses at banks that later failed.

This time around, the stress test’s adverse scenario is predicated on economic output that misses the European Commission’s growth forecasts by 2.2 percentage points in 2014, 3.4 points in 2015 and 1.4 points in 2016, the people said, citing an EBA document.