You have to imagine many banks today as businesses under constant stress: low interest rates, cost issues, restructuring programs and job cuts – there was a lot of difficulty, then there was also had a pandemic. The worst economic downturn since the financial crisis initially appeared to be an acute threat to the banking sector, with fears of a wave of bankruptcies and an increase in defaults. The European Banking Authority (EBA) and the European Central Bank had therefore postponed their stress test scheduled for 2020 by one year; First of all, there were more important things to do. This Friday evening, supervisors released their results.
According to this, European banks would be well equipped and sufficiently capitalized to face a severe economic shock. In a hypothetical crisis scenario, institutions would lose nearly a third of their capital buffers. Nonetheless, the EU banking sector would remain on average above the ten percent mark in terms of capital ratio, as a cushion for possible setbacks. In a country-by-country comparison, Germany ranks third from the bottom with seven institutes examined, ahead of Italy and Ireland.
With their large-scale endurance test, bank inspectors wanted to know every two years since the sovereign debt crisis how vulnerable European banks would be in the event of a crisis. This time, the crisis scenario was much more violent than before under the impression of the corona effects. Regulators assumed a recession by 2023, with economic output in the EU falling 3.6%. Unemployment would increase by 4.7 percentage points, market interest rates would continue to fall and, at the same time, prices for residential (minus 16.1 percent) and commercial (minus 31.2 percent) real estate. percent) would collapse – in the simulation.
Deutsche Bank and Commerzbank are well equipped for crises
Supervisors are first interested in what is called Tier 1 capital. In other words, on the capital that banks have without restriction even in the event of losses. Requirements in this regard have been tightened since the financial crisis. At that time, on the basis of a banking crisis in the United States, many European banks were on the verge of collapse or could only be saved by government capital subsidies. The stress test shows that this is much less likely today. “European banks are strong, they are resilient,” ECB Vice President Luis de Guindos said in an interview.
This declaration could, with certain reservations, also be transferred to German houses. In the current stress test, besides Deutsche Bank and Commerzbank, DZ Bank, Landesbanken LBBW, Helaba and Bayern-LB as well as the Volkswagen Group Bank had to provide data. Deutsche Bank, now with a lush core capital ratio of 13.6%, would be hard-hit in the crisis scenario: its capital buffer would shrink to 7.6%. This would leave little, but still significantly more than the minimum of 5.9% required by the supervisory authority. Despite the much more drastic scenario, the result is only slightly worse than in 2018, stressed Germany’s largest financial institution. In a worst-case scenario, Commerzbank’s equity ratio would fall to 8.2%.
In total, the EBA had the stress test scenarios calculated by 50 financial institutions from 15 countries. 38 of them are euro zone banks which are directly controlled by the ECB. At the same time, the central bank examined 51 of the 114 institutions directly supervised by it. The partially nationalized Italian bank Monte dei Paschi came last in the test, and its capital ratio even turned negative in the stress scenario.