European banking supervisors welcomed the increased strength of the European banking sector and its ability to better withstand a sharp downturn in the economy, following the publication, on Friday 2 November, of the results of the 2018 edition of the banking stress tests coordinated by the European Banking Authority (EBA).
"The outcome confirms that participating banks are more resilient to macroeconomic shocks than two years ago. Thanks also to our supervision, banks have built up considerably more capital, while also reducing non-performing loans, and among other things, improving their internal controls and risk governance", said Danièle Nouy, outgoing President of the ECB's Single Supervisory Council, in a statement.
All the banks tested - 48 European groups, including 33 euro area financial institutions, representing 70% of total banking assets - managed to maintain an optimal level of capital (CET 1) above 5.5% in the extreme scenario envisaged for 2018.
Aggregately, the panel's CET 1 capital level would rise from 14.5% at the end of 2017 to 10.3% at the end of 2020 if the worst-case scenario envisaged were to materialise and in accordance with the prudential banking rules currently applicable. The same ratio would decrease from 14.2% at the end of 2017 to 10.1% at the end of 2020 if all the prudential rules resulting from the Basel III reform are applied.
In volume terms, the fall in bank capital would reach 226 billion euros, losses related to credit risks would amount to 358 billion euros and those related to market risks to 94 billion euros.
Among the lowest-ranked institutions are two British banks: Barclays and Lloyds Banking Group would have capital ratios of 6.37% and 6.8% respectively. In Italy, where the soundness of the banking sector is being examined against the backdrop of budgetary tensions between Rome and the European level (see other news), Banco BPM and UBI Banca completed the tests with a capital level of 6.67% and 7.46%, knowing that Monte dei Paschi di Siena was not affected. In Germany, Norddeutsche Landesbank Girozentrale finished with a ratio of 7.07% while Deutsche Bank, the leading German bank, ranked 40th out of 48 institutions tested with a ratio of 8.14%. Of the six French groups tested, Societe Generale scored the lowest with a ratio of 7.61%.
"Concretely this means that the European banking system is well equipped to withstand a major shock in the economy. This result, and the overall outcome mark a clear improvement compared with the previous exercises and it reflects the ongoing recapitalisation strategy followed by all banks across Europe", said the European Banking Federation in a statement.
These results, and those expected in December from the ECB's banking transparency exercise on some 60 European banks, will feed into the prudential dialogue between supervisors and banking groups and could lead to the imposition of new capital requirements for those institutions considered most vulnerable.
More demanding than the scenario used in 2016, the 2018 scenario envisages a cumulative deterioration of 2.7% of EU GDP between 2018 and 2020, an increase in unemployment to 9.7%, inflation to 1.7% over the period and sharp falls in prices in both the commercial (-20%) and residential (-19.1%) property sectors. The new IFRS 9 accounting standard, which requires banks to provision for certain probable losses more quickly, was used for the first time.
More information: http://bit.ly/2AMJkFS. (Original version in French by Mathieu Bion)