Status: 07/30/2021 8:14 am
Less income in times of zero interest rates, digital competition and then Covid: The banks have problems. The European banking supervisory authority is now presenting the results of the latest stress test.
The moment of truth strikes every two years for Europe’s financial institutions. The European supervisory authority asks you to calculate how the bank would cope with a negative scenario and how much equity would be left as security after a long and far-reaching crisis. Applied to a private household, this means calculating whether the family budget can cope if the refrigerator, roof and car break down at the same time. Seven banks from Germany are taking part in the stress test: in addition to Deutsche Bank and Commerzbank, the Landesbanken Hessen-Thüringen, Baden-Württemberg and BayernLB as well as the Volkswagen Bank and the DZ Bank.
Postponed for a year due to the pandemic
It actually happened again last year, but due to the pandemic, the supervisors of the European banking authority (EBA) postponed the test until this year. The authority plans to publish the results this evening. The test covers the entire European Union – 50 banks. 38 of them are based in the euro currency area. These are supervised by the European Central Bank (ECB), which also carries out the stress tests there on behalf of the EBA. After Brexit, the British financial institutions are no longer there.
Chief ECB banking supervisor Andrea Enria believes the new information will help to understand the real situation of credit institutions: “This year’s stress test will shed light on how bank balance sheets would change in the face of renewed adversity.” This allows the ECB to discuss dividend payments to shareholders with the financial institutions in a more well-founded manner.
A real and a fictional scenario
The EBA provides two scenarios. One is based on the real economic forecasts of central banks such as the Bundesbank. There is also a crisis scenario: economic output will decline by 3.6 percent by 2023, unemployment will skyrocket by 4.7 percent, prices for commercial real estate collapse, and so will the stock markets.
Now the banks are supposed to prove that they can get through such a violent crisis without faltering on their part. Do you still have enough capital after a long time with these bad news? The EBA specifies the rules for the test and checks with the ECB and the national central banks; However, the banks have to calculate for themselves. In a further stress test, the ECB independently subjects 51 other banks from the euro currency area that were too small for the European supervision of the EBA. That creates more security, according to the European Central Bank.
Is the crisis scenario not “extreme” enough?
The banks’ figures are also intended to provide the ECB’s bank guards with information about the additional security requirements they will impose on the respective financial institutions in the future. In addition to the legal requirements for holding equity, the ECB requires additional collateral from the supervised financial institutions. The calculated numbers of the stress test help.
“I’m careful with this test,” says Volker Brühl from the Center for Financial Studies at the University of Frankfurt am Main. No extreme crisis scenarios were used as a basis. But that could possibly get a number of banks in really serious trouble. These regular stress tests are always better than nothing.
Next year comes the “climate risk stress test”
In the last stress test in 2018, all banks had enough capital buffers for the assumed crisis. NordLB was the worst performing bank in Germany. Bad ship loans were to blame for this. Nobody can fail the current test, because there is no minimum capital ratio. But the supervisors could condemn banks to provide more capital as security.
The supervisors want to start a “climate risk stress test” next year. The question is: To what extent do climate risks, such as rising temperatures, also represent a risk for banks, i.e. they can be found in their balance sheets. This means that the bank inspectors are breaking new ground.