Because of the corona pandemic, Europe’s banks were given a deadline. Now the supervisors are putting the institutes under stress again. The results of the German financial institutions are generally weak.
Europe’s banks have survived the supervisors’ toughest crisis test to date, mostly without major damage.
The capital buffers of most of the financial institutions examined proved to be sufficiently sustainable even under the most adverse conditions. In the stress test of the European banking supervisory authority EBA, however, the German institutes performed rather poorly overall and came in 13th in a comparison of the 15 countries.
Basically, banks could not fail the parallel stress tests of the European Banking Authority (EBA / Paris) and the European Central Bank (ECB / Frankfurt). However, in the case of the Italian Monte dei Paschi, which had been in crisis for a long time, the entire capital buffer was used up in the simulated crisis. Deutsche Bank was one of the weakest institutes in the stress test.
On the basis of their 2020 balance sheet, the supervisors had banks calculate how much capital buffers would shrink by the end of 2023 if the pandemic and economic downturn came to a head with a cumulative slump in the EU economy of 3.6 percent. In addition, a whole bundle of unfavorable developments was assumed: rising unemployment, collapse in property prices, falling foreign demand, falling market interest rates.
In this crisis scenario, according to EBA calculations, the banking sector in the European Union would lose a total of 265 billion euros in capital. The core tier 1 capital ratio as a buffer for setbacks would decrease from 15.0 percent at the end of 2020 to 10.2 percent at the end of 2023.
50 banks from 15 European countries had to face the EBA test. 38 of these institutions are banks from the euro area and are therefore subject to ECB supervision. In parallel to the EBA test, the ECB scrutinized a further 51 euro banks directly supervised by it.
A total of 16 German institutes took part in the parallel tests by the EBA and the ECB, 7 of them in the EBA test. The hardest hit by the EBA stress scenario was Deutsche Bank, whose capital buffer melted to 7.4 percent. The Commerzbank came to 8.2 percent. The best German institute in the EBA test was Volkswagen Bank, which still had a core capital ratio of 15.48 even in the most severe stress scenario. The DZ Bank ended up with 10.21 percent exactly in the European average. The EBA also examined the three Landesbanken BayernLB, Landesbank Baden-Württemberg (LBBW) and Landesbank Hessen-Thüringen (Helaba).
In total, the seven German banks ended up below the average in the EBA test and in a country comparison with an average core capital ratio of 8.78 percent, just ahead of Italy (8.60 percent) and Ireland (8.44 percent) at the bottom.
“Because of the high exports of the German economy and the strong dependence of German banks on the interest business, the capital consumption of German banks is slightly higher than the EU average,” said Bundesbank board member Joachim Wuermeling. “This is neither a cause for concern nor a weakness, it just reflects the greater vulnerability of the German economy in a global recession.”
Norway achieved the best value (17.08 percent), although only one bank from the non-EU country was tested by the EBA. Among the EU countries, the Swedish banks top the list with an average core capital ratio of 16.12 percent. The Dutch development bank Nederlandse Waterschapsbank performed best with a rate of 37.83 percent.
Overall, Europe’s banking supervisors certified the institutes soundness. “The results show that the banking system in the euro area is resistant to unfavorable economic developments,” summarized the ECB banking regulator.
Banks that performed worse in the hypothetical crisis scenario must, however, expect the supervisors to instruct them to strengthen their capital buffers in order to better prepare themselves for possible setbacks. The overseers could step on the brakes at such houses when distributing dividends.
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 pandemic, the EBA postponed the examination for a year.
Since the global financial and economic crisis of 2008/2009, supervisors around the world have regularly used such stress tests to determine 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 and how heavily in the hypothetical scenarios ultimately lies in the hands of the supervisors.
The Deutsche Kreditwirtschaft (DK), the umbrella organization of the five major banking associations in Germany, warned: “From a banking perspective, the stress test should primarily be the subject of bilateral discussions between banks and supervisory teams. Because the partly blanket approaches reduce the transparency and informative value of the results. “
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.
