The European banking sector appears to be resilient even in the worst-case scenarios developed by the European Banking Authority (EBA) in connection with the pandemic, according to its latest report on the EU-wide stress tests of banks, published at the end of the day on Friday 30 July.
Thus, in its worst-case scenario, which the authority itself considers “very severe”, the European banking sector would remain above a CET1 ratio of 10%, with a capital reduction of €265 billion compared to a starting CET1 ratio of 15%. The Authority notes a sharp increase in the total risk exposure amount (REA) of €868 billion at the end of the three-year horizon, resulting in a decrease of 485 basis points in the CET1 ratio.
The results also show a “ dispersion” between banks. For example, banks that focus more on domestic activities or have lower net interest income (NII) have higher depletion.
Credit losses, as in previous years, would account for most of the depletion of equity. The ‘lower-for-longer’ scenario (a cumulative decline in GDP of 3.6% in the EU from 2020 to 2023) would also result in a significant decline in the contribution of profits from continuing operations, including net interest income.
Satisfactory results
Since the previous stress test in 2018 (see EUROPE 12130/5), banks have continued to strengthen their capital base, the Authority says. At the beginning of the year (i.e. end of 2020), they had a CET1 ratio of 15% (15.3% on a “transitional basis”, according to the Basel III accords).
This is the highest ratio since the EBA started conducting stress tests. This has been achieved despite an unprecedented decline in EU GDP and the first effects of the Covid-19 pandemic in 2020, the Authority says.
Taking into account the pandemic and not climate change
The current exercise was originally planned for 2020, but was postponed by the EBA due to the Covid-19 pandemic to allow banks to prioritise “operational continuity”.
As in previous exercises, the adverse scenario for the EBA’s EU-wide stress test reflects the main risks to banks, this time with the addition of an adverse scenario related to ongoing concerns about the possible evolution of the pandemic.
In contrast, the EBA says that climate change risks are not “explicitly” taken into account, but a methodology for taking this dimension into account is under development, it said.
The 2021 exercise covers a sample of 50 banks representing around 70% of total EU bank assets, but due to Brexit, UK banks are no longer included in the sample.
To consult the report: https://bit.ly/3llFhYC (Original version in French by Pascal Hansens)