Status: 07/30/2021 7:40 p.m.
Could Europe’s financial institutions 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.
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 capital 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.
German banks less well equipped
German banks performed worse than the average. At Deutsche Bank, the Common Equity Tier 1 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, ended up with a rate of 10.21 percent, exactly in line with the European average.
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 it supervised directly. According to the information, the core tier 1 capital ratio of the 89 banks from the euro area in the parallel stress tests of the ECB and the European banking regulator EBA would fall 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, it said in the evening .
No bank failed the stress test. However, the 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.