How crisis-proof are Europe’s banks? In the past few months, the institutes had to calculate a number of scenarios again. One thing is already clear: there is no diarrhea on the exam.
A year later than originally planned, Europe’s supervisors have again subjected the banks on the continent to a major health check.
Are the institutes adequately equipped if the corona pandemic worsens again? Are the capital buffers enough for a severe economic slump? In the past few months, the financial institutions had to calculate how a combination of various stress factors would affect their balance sheet.
The European Banking Authority (EBA) and the European Central Bank (ECB) are publishing the results of the stress test today. The new edition of the European bank stress test should actually be carried out in 2020. But in order not to burden the institutes with further tasks in the middle of the Corona crisis, the examination was postponed.
The European Banking Authority (EBA) took a close look at 50 financial institutions from 15 countries, which together in terms of their assets represent around 70 percent of the banking market in Europe. These include 7 from Germany: BayernLB, Commerzbank, Deutsche Bank, DZ Bank, Landesbank Baden-Württemberg, Landesbank Hessen-Thuringia, Volkswagen Bank.
38 of the 50 institutes in the EBA test are banks from the euro area that are centrally monitored by the ECB. In parallel to the EBA test, the ECB examined another 51 banks that it directly supervises in an almost identical stress test for the euro area.
In the crisis scenario of the EBA test, which is considered particularly harsh, it is assumed that the corona crisis is worsening and the economic setbacks as a result of the pandemic will last longer. In this scenario, the economy in the European Union would shrink by a cumulative 3.6 percent in the three years up to 2023. At the same time, the unemployment rate would rise and property prices would collapse sharply. In addition, it is assumed that market interest rates will continue to fall.
Banks cannot fail the tests. The results flow into the “SREP” process (“Supervisory Review and Evaluation Process”), in which supervisors assess the viability of business models and the appropriateness of risk management. On this basis, the supervisors can instruct individual institutions to strengthen their capital buffers.
Since the financial and economic crisis of 2008/2009, supervisors around the world have regularly used such stress tests to check where possible risks lie dormant in the balance sheets and how vulnerable banks would be in the event of a crisis. Such tests and the conclusions drawn from them are not undisputed. Because which risks are weighted to what extent in the hypothetical scenarios is ultimately in the hands of the supervisor.
Jane Stock is a technology author, who has written for 24 Hours World. She writes about the latest in technology news and trends, and is always on the lookout for new and innovative ways to improve his audience’s experience.
