EU stress test shows three banks falling short

EU stress test shows three banks falling short

Three banks from the European Union did not meet binding capital requirements in a stress test conducted by the bloc’s banking watchdog. The test resulted in a theoretical loss of 496 billion euros ($546 billion) from their buffers.

Bank stress tests were introduced in Europe and the United States after the 2008 global financial crisis to prevent undercapitalized lenders from requiring taxpayer bailouts. These tests are now a routine part of supervision to ensure banks can support the economy during times of market stress.

The European Banking Authority (EBA) conducted the test on 70 banks, 20 more than in 2021. The test included 57 banks from the euro zone overseen by the European Central Bank, representing about 75% of banking assets in the EU.

The results of the stress test highlighted the performance of several German lenders, who ended the test with modest capital cushions.

Out of the 14 German banks tested, 8 had CET1 and leverage ratios below the EU average, while 6 were above. The banks that performed well were primarily subsidiaries of U.S. banking giants or financing arms of companies like Volkswagen Bank.

La Banque Postale of France, whose capital was nearly wiped out in the adverse scenario, argued that the test did not account for a new accounting rule that would moderate the impact of market shocks.

The EBA did not disclose the names of the three banks that fell short in meeting the capital requirements.

The stress test conducted by the EBA was described as the toughest one yet. It examined the impact of a three-year scenario, including credit, market, and operational risk losses, on a bank’s mandatory core capital buffer. The scenario included a cumulative 6% slump in economic growth and significant declines in property prices.

At the beginning of the test, banks had an average buffer of 15% of their risk-weighted assets. By the end of the third year of the test, they had incurred losses of 496 billion euros, depleting their capital buffers by 459 basis points to an average of 10.4%.

The reduction in capital buffers was smaller compared to previous tests, thanks to better profitability, regulatory reforms since the global financial crisis, and higher asset quality at the start of the test, according to the EBA.

The European Banking Federation, an industry body, stated that the results reaffirmed the resilience of the EU banking sector.

Although there is no pass or fail mark in the stress test, banking supervisors use the results to determine if banks need to hold additional capital on top of their mandatory core buffer, known as the total SREP capital requirement or TSCR.

According to the EBA, all banks except three met the TSCR under the adverse scenario. However, four banks did not meet their mandatory leverage ratio requirement, which is a broader measure of capital to total assets.

The EBA also noted that 37 banks fell below capital levels in year three of the test, triggering restrictions on payouts.

Deutsche Kreditwirtschaft, an umbrella association representing the German financial industry, praised the resilience of German banks but criticized the approach taken by the ECB. It argued that the ECB’s markups in later steps of the process increased stress-related capital losses and undermined market confidence.

An ad-hoc analysis of banks’ bond holdings in the face of rapidly rising interest rates revealed unrealized losses of 73 billion euros in February. However, this figure could more than triple if the EU’s economy experiences severe stress.

($1 = 0.9078 euros)

About News Team

Hi, I'm Alex Perez, an experienced writer with a focus on lifestyle and culture news. From food and fashion to travel and entertainment, I love exploring the latest trends and sharing my insights with readers. I also have a strong interest in world news and business, and enjoy covering breaking stories and events.

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