You have to imagine many banks nowadays as companies under constant stress: low interest rates, cost problems, restructuring and job reduction programs – there have been a lot of difficulties, and then there was also a pandemic. The worst economic downturn since the financial crisis initially looked like an acute threat to the banking sector, with fears of a wave of bankruptcies and rising loan defaults. The European Banking Authority (EBA) and the European Central Bank had therefore postponed their stress test planned for 2020 by one year; First of all there were more important things to do. Now this Friday evening the guards have theirs Results published.
According to this, Europe’s banks would be well equipped and adequately capitalized for a severe economic shock. In a hypothetical crisis scenario, the institutions would lose almost a third of their capital buffers. Nevertheless, the EU banking sector would on average stay above the ten percent mark in terms of the capital ratio as a cushion for possible setbacks. In a country comparison, Germany ranks third from bottom with seven institutes examined, ahead of Italy and Ireland.
With their large-scale endurance test, the bank inspectors have wanted to know every two years since the sovereign debt crisis how vulnerable Europe’s banks would be in the event of a crisis. This time, the crisis scenario was significantly more violent than before under the impression of the corona effects. The supervisors assumed a recession by 2023, with a decline in economic output in the EU of 3.6 percent. Unemployment would rise by 4.7 percentage points, market interest rates would fall further, and at the same time prices for residential (minus 16.1 percent) and commercial property (minus 31.2 percent) would collapse – in the simulation.
Deutsche Bank and Commerzbank well equipped for crises
The supervisory authorities first look at what is known as core core capital. In other words, on the capital that the banks have unrestrictedly at their disposal even in the event of losses. The requirements for this have been tightened ever since the financial crisis. At that time, based on a banking crisis in the USA, many European banks were on the verge of collapse or could only be rescued by government capital grants. The stress test shows that this is much less likely today. “Europe’s banks are robust, they are resilient,” said ECB Vice President Luis de Guindos in an interview said.
This statement could, with some reservations, also be transferred to the German houses. In the current stress test, in addition to Deutsche Bank and Commerzbank, DZ Bank, Landesbanken LBBW, Helaba and Bayern-LB as well as the bank of the Volkswagen Group had to provide data. Deutsche Bank, now with a lush core capital ratio of 13.6 percent, would be caught hard in the crisis scenario: its capital cushion would shrink to 7.6 percent. That would leave little, but still significantly more than the minimum of 5.9 percent required by the supervisory authority. Despite the much more drastic scenario, the result is only marginally worse than in 2018, emphasized Germany’s largest financial institution. In the worst case scenario, Commerzbank’s capital ratio would fall to 8.2 percent.
In total, the EBA had 50 financial institutions from 15 countries calculated the stress test scenarios. 38 of them are banks from the euro area, which are directly monitored by the ECB. In parallel, the central bank examined 51 of the 114 institutions directly supervised by it. The partially nationalized Italian bank Monte dei Paschi came in last in the test, and its capital ratio even slipped negative in the crisis scenario.