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Europe’s banks are stress-resistant

Could Europe’s financial institution’s weather another economic crisis? The banking supervisors examined this in a stress test. The result: the banks would be prepared for the crisis despite the loss of capital.

Due to the corona pandemic, the negative interest rates, and the strong cost pressure, Europe’s banks are already stressed enough. How hard would it hit you if a new crisis came, in which the economy and the stock markets collapsed? The European banking supervision EBA and the supervision of the European Central Bank (ECB) have examined this. They had over 100 banks calculate how sustainable their capital buffers are in stress scenarios.

Financial institutions in the stress test how fit are Europe’s banks? Less income in times of zero interest rates, digital competition, and then Covid: The banks have problems.

The core capital ratio would shrink by almost a third

The guards published the results on Friday evening. According to the EBA stress test, the financial institutions would lose almost a third of their capital buffers in the simulated crisis scenario. The Common Equity Tier 1 ratio would shrink from 15 percent at the end of 2020 to just 10.2 percent at the end of 2023. In the crisis scenario, a significant economic slump of 3.6 percent in the EU, a rising unemployment rate to 12.1 percent, a fall in commercial property prices, and a stock market slump were assumed.

More dividends allowed against banks pass the stress test, While Europe’s banks are only allowed to pay dividends to a limited extent, the limits for US banks have fallen.

German banks less well equipped

German banks performed worse than the average. At Deutsche Bank, the core capital ratio would decrease from 13.6 percent at the end of last year to 7.6 percent in 2023. At Commerzbank, the rate would be 8.5 percent in the event of a crisis.

Nevertheless, the two banks commented positively on the results. “Even in an even more unfavorable scenario, Deutsche Bank proves its resilience in a possible economic crisis,” said the bank’s CFO, James von Moltke. Commerzbank Chief Risk Officer Marcus Chromik was also pleased. “Commerzbank has comfortable liquidity and capital buffers. That gives us enough leeway for our transformation,” he explained.

VW Bank does best

The best German institute in the EBA test was Volkswagen Bank, which still had 15.48 percent of its core capital ratio even in the most severe stress scenario. The top cooperative institute, DZ Bank, landed exactly within the European average with a rate of 10.21 percent.

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 (8.6 percent) and Ireland (8.44 percent) at the bottom. “Because of the high exports of the German economy and the strong dependency 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.”

The EBA examined 50 banks from 15 European countries, including seven institutes from Germany. In addition to Deutsche Bank and Commerzbank, BayernLB, DZ Bank, Landesbank Baden-Württemberg, Landesbank Hessen-Thüringen (Helaba) and Volkswagen Bank were also subjected to the stress test.

Parallel stress test by the ECB

In an almost identical stress test, the ECB scrutinized a further 51 banks from the euro area that is supervised directly. For them, the core capital ratio fell on average in the crisis scenario to 11.3 percent from 18.1 percent. Nine German institutes were present here.

The core tier 1 capital ratio of the 89 banks from the euro area in the two stress tests of the ECB and the EBA would, according to the information, decrease by an average of 5.2 percentage points – from 15.1 percent at the end of 2020 to 9.9 percent at the end of 2023. The worst would be to catch Italian Monte Paschi. In a crisis scenario, you would lose all of your equity.

No bank failed the stress test. However, poorly performing financial institutions should take action to increase their capital buffers. Otherwise, the European banking supervisors are likely to intervene and, for example, set limits on the distribution of dividends.

The bank supervisors intervened at Commerzbank in the past. At the end of 2018, when they examined the business model, they doubted the profit targets of the Frankfurt financial institution. A year ago, the supervisory authorities criticized Commerzbank’s strategy, which was not rigorously forward-looking.


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