The European Central Bank has developed two new indicators, the Stress Vulnerability Index (SVI) and the Profitability Vulnerability Index (PVI), to monitor vulnerabilities among euro area banks and complement regular stress tests.

The SVI evaluates potential declines in a bank’s capital under adverse scenarios from credit risk and changes in risk-weighted assets, while the PVI assesses pressure on current income and the ability to build capital from profits, especially net interest income.

The paper discusses how these indicators could guide decisions on precautionary capital buffers—when to introduce, strengthen, maintain, or remove them—and notes a recent divergence where SVI stayed elevated even as profitability (PVI) improved, supporting a cautious approach to buffering.

ECB findings show both indices rose during the global financial and European debt crises, with the profitability indicator rising more sharply under acute stress, and that the indices can move in different directions, such as capital-loss risk falling when profitability is weak or recession concerns rising even if current income improves.

Historically, both indicators tracked the likelihood of banks receiving state support after the global financial crisis, suggesting they could help identify vulnerable banks and countries for supervisory and financial stability actions.

The indicators are presented in a new ECB working paper and will be updated quarterly using data from EU-wide solvency stress tests conducted every two years by the ECB and the European Banking Authority.