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The European Central Bank is to test the eurozone’s biggest lenders for their vulnerability to a rapid rise — or fall — in interest rates.

The ECB’s supervisory wing, the SSM, unveiled details of its latest round of stress tests on Thursday evening. Tests of 110 banks in the region will feature six possible scenarios for how banks would react to rapid movements in borrowing costs.

Interest rates in the region are at record lows and are set to remain there for the duration of this year.

The SSM will also review the internal models banks use to manage three types of risks: credit, counterparty and market risks.

The move comes as global standard-setters are due to meet next month over a controversial set of reforms intended to stop banks using their internal models to game existing rules put in place since the financial crisis.

The mooted reforms have caused a transatlantic split, with European banks and politicians complaining they would disproportionately hit their balance sheets harder at a time when they are already suffering from stagnant profitability and low interest rates.

US policymakers have previously pushed the concept of so-called output floors, which limit the benefit banks can derive from their internal models versus regulators’ own standardised ones. There are questions, however, over the future direction of US representatives to the Basel Committee on Banking Supervision under President Trump, who has pledged to roll back certain financial regulations.

Mario Draghi, president of the ECB, also heads BCBS’s oversight board, which is meeting in mid-March about the reform package.

Official estimates in the UK have shown that the difference in the amount of capital set against the same residential mortgage can be as high as 960 per cent for those lenders using the standardised approach compared with internal models.

Copyright The Financial Times Limited 2019. All rights reserved.

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