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Coronavirus resistance test

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Coronavirus resistance test

The endurance test of banks across Europe started yesterday, the first to be done in the midst of a pandemic by the European Banking Authority. The pan-European test will be conducted on a sample of 50 banks from 38 EU countries, covering 70% of the total banking assets in the EU and including the systemic banks of Cyprus (Bank of Cyprus, Hellenic, RCB Bank). The exercise assesses the impact of an adverse macroeconomic scenario on the solvency of EU banks.

The stress test allows supervisors to assess whether banks' capital reserves, which have accumulated in recent years, are sufficient to cover losses and support the economy in times of stress.

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Following the postponement of the 2020 exercise due to the COVID-19 pandemic, this year's EU-wide stress test will make a valuable contribution to assessing the resilience of the European banking sector. Consequently, the adverse scenario is based on a narrative of a prolonged COVID-19 scenario in which negative shock will prolong the economic contraction. The result of the simulation exercise can provide a valuable contribution to making informed decisions about possible exit strategies for flexibility measures granted to banks due to the COVID-19 crisis or the need for additional measures if economic conditions deteriorate further. EBA expects to publish the results of the exercise by 31 July 2021. It notes that given the specific macroeconomic conditions caused by the COVID-19 pandemic combined with the high degree of uncertainty, this year the focus on targets will depend on the circumstances. which will prevail on the date of publication.

Scenarios for Cyprus

The scenarios of the European Banking Authorities that will be used for Cyprus and announced yesterday predict: House prices, according to the basic scenario, are expected to decrease by 0.4% in 2021 and will increase by 0.3% and 1.2% in 2022 and 2023 respectively. In the extreme scenario, the decrease is 1.7% this year, 2% and 0.4% in 2022 and 2023. In commercial real estate, prices in the baseline scenario are expected to increase 0.3% for 2021, 2022 and 2023. In extreme scenario predicts a reduction in prices of 10.2% in 2021, 6.8% in 2022 and 2.4% in 2023.

The economy of Cyprus in the basic scenario will have a growth of 4.1% in 2021, in 2022 at 3.4% and in 2023 at 2.7%. In the extreme scenario, the economy will have a recession of 0.8% in 2021, 0.9% in 2022 and 0.4% in 2023. In terms of unemployment, according to the baseline scenario it will rise to 7.6% this year, in 6.8% in 2022 and 6.3% in 2023 while in the extreme scenario it rises to 8.1%, 10% and 12.8% respectively. For inflation, according to the baseline scenario, it is estimated to be 0.5% this year, 0.9% in 2022 and 1.2% in 2023. In the extreme scenario it will be 0.1% this year, 0.4% and 0 , 3% in 2022 and 2023.

According to the EDF, the unfavorable scenario is designed to ensure an adequate level of seriousness in all EU countries. By 2023, at EU level, real GDP will fall by a cumulative 3.6%, the unemployment rate will rise by 4 , 7 percentage points, real estate prices will fall by 16.1% and commercial real estate prices will fall by 31.2%. The unfavorable scenario of 2021 is very serious having in mind the weak macroeconomic starting point in 2020 as a result of the severe recession from the pandemic.

Source: www.philenews.com

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