The impact of the unfavorable scenario of stress tests on European banks “reaches” 265 billion euros, with the CET1 index remaining above 10%, while keeping two thirds of their pillows intact.
In particular, the European Banking Authority (Eurobean Banking Authority) yesterday published the results of stress tests across the EU for 2021, in which 50 banks from 15 EU and EEA countries participated, covering 70% of the banking sector assets of the EU.
According to a statement from the European Banking Authority, the results include detailed data for the 38 euro area banks in the sample. For the first time, the ECB also published selected information on the 51 medium-sized banks, which are not included in the EBA sample.
The average total capital decrease was 5.2 percentage points and is analyzed as follows: For the 38 banks that participated in the EBA exercise, the average CET1 index fell by 5 percentage points, from 14.7% to 9.7%. The average capital reduction for the 51 medium-sized banks that participated exclusively in the exercise of the ECB corresponded to 6.8 percentage points, ie the relevant index fell to 11.3% compared to the starting point (18.1%).
The main reason for this difference in the capital reduction under the adverse scenario is that medium-sized banks are more affected by lower net interest income, lower net fee and commission income and reduced transaction portfolio income. three-year exercise horizon.
Also, according to the results, the first major factor that contributed to the reduction of the capital was the credit risk, because the financial turmoil in the unfavorable scenario led to losses from loans. Despite the overall resilience of the banking system, due to the new challenges posed by the coronavirus (COVID-19) pandemic, banks need to ensure that credit risk is properly measured and managed.
For a subset of banks, the second major factor contributing to the decline in capital was market risk. The fact that the value of many financial products had to be fully adjusted was the biggest single market risk factor. This has particularly affected the larger banks, as they are more exposed to stock and credit margins.
The third key factor was the limited ability to generate income in adverse economic conditions, as under the adverse scenario the banks were faced with a significant reduction in their net interest income, their trading book income and their net fee and commission income. .
Credit risk, market risk and revenue-generating capacity are the three main issues that ECB supervisors focus on in their day-to-day supervisory work.
The 50 largest banks in the EU are holding up
The positive results of stress tests in the largest European banks bring closer the return to normalcy. According to the results announced last night by the European Banking Authority, the banks received 265 billion euros in the endurance test, based on the unfavorable scenario, but nevertheless kept 2/3 of their pillows intact. The 50 banks participating in the stress test account for 70% of the assets in the EU.
In the unfavorable scenario, the capital adequacy ratio, according to the risk-weighted assets, hits 485 points and the CET1 fully loaded index falls to 10.2% from 15%. Compared to previous stress tests across the EU in 2018, banks continued to strengthen their capital base. At the beginning of the tests, ie at the end of 2020, they had a CET1 of 15%. This was achieved despite the unprecedented decline in EU GDP due to the effects of the Covid-19 pandemic in 2020. The European Banking Authority notes that the stress tests for European banks were based on an unfavorable scenario, according to which GDP in The eurozone will shrink by 3.6% in 2021, which is a very pessimistic outlook.