Sunday. 04.06.2023

ECB says Europe's banks are robust following stress test

Of the banks from the European Union, the Swedish institutions performed best
FILED - Frankfurt skyline Photo: Boris Roessler/dpa
Frankfurt skyline. Photo: Boris Roessler/dpa.

The European Central Bank (ECB) affirmed that the major financial institutions in the eurozone are stable on Friday, based on the results of the latest stress tests.

"The results show that the euro area banking system is resilient to adverse economic developments," the ECB banking supervisor said on Friday.

In parallel exercises, the Paris-based European Banking Authority (EBA) carried out tests on 50 financial institutions in 15 European countries while the Frankburt-based ECB on a further 51 banks in the 19-member eurozone under its purview.

The core capital ratio of the 89 eurozone banks would fall by an average of 5.2 percentage points from 15.1 per cent at the end of 2020 to 9.9 per cent at the end of 2023, according the tests.

The institutions had to calculate, based on their 2020 balance sheet, how their capital buffers would decrease in a three-year stress scenario.

The supervisors instructed the banks to estimate to what extent their capital buffers would decline by the end of 2023 on the basis of their situation in 2020, overshadowed by the coronavirus, if the pandemic and economic slump were to worsen.

Additional unfavourable events are also assumed in the test, including rising unemployment, a collapse in property prices, a sharp drop in foreign demand and a further fall in interest rates.

Earlier, European Central Bank Vice President Luis de Guindos said Europe's banks were in good shape, in an interview with the German business daily Handelsblatt published on Friday.

"Europe's banks are robust. They are resilient," the former Spanish economy minister said ahead of the publication by the ECB of its latest stress tests for European banks.

Worst-case scenario

"Our worst-case scenario is even more challenging this time than at the last test in 2018, and the banks have in addition just coped with the difficult year of 2020," De Guindos said.

"Despite this challenging starting point, I expect that the banks will have done well in the test on the whole."

The ECB has been supervising the largest banks and banking groups in the common currency area since November 2014, with 114 institutions representing almost 82 per cent of the market in the 19-country currency area.

Monte dei Paschi di Siena (MPS), an Italian bank with a long history and a troubled present, would see its capital buffers totally wiped out, according the EBA test.

The core capital ratio in the scenario drops from 9.86 per cent at the end of 2020 to minus 0.10 per cent at the end of 2023.

For comparison the ratio of Tier 1 capital - seen as the safest kind - across all banks examined by the EBA would fall from 15 per cent at the end of 2020 to 10.2 per cent at the end of 2023.

On average, the Italian banks come to a core capital ratio of 8.6 per cent in the 2023 scenario. Irish lenders are slightly lower at 8.44 per cent; the German institutions a little higher at 8.78 per cent. French banks performed almost 1 percentage point better at 9.72 per cent, but are also below the European average.

Deutsche Bank hit hardest

Among the German lenders, Deutsche Bank was hit hardest by the EBA's hypothetical macroeconomic crisis scenario, according to data published on Friday.

The core capital ratio of Germany's largest bank would fall from 13.6 per cent at the end of 2020 to 7.4 per cent at the end of 2023 in the event of an economic slump coupled with various other aggravating factors.

Core capital is seen by regulators as a measure of a bank's health as it is helps lenders absorb market or economic shocks.

Commerzbank, which had entered the test with a 13.2 per cent core capital ratio, slipped to 8.2 per cent in the crisis scenario.

The frontrunner among the countries in the test was the non-EU state Norway, with a rate of 17.02 per cent. However, the EBA only examined one bank there.

Of the banks from the European Union, the Swedish institutions performed best with an average rate of 16.12 per cent.

ECB says Europe's banks are robust following stress test