by Huw Jones
LONDON (Reuters) – The European Banking Authority (EBA) launched a stress test on Tuesday to check the strength of commercial banks in the community bloc in the face of prolonged inflation and high interest rates for a long time, two days before the deadline. monetary policy meeting of the European Central Bank (ECB) which should result in a further rise in the cost of credit.
This test, carried out every two years, must take into account the evolution of the macroeconomic environment since the invasion of Ukraine by Russia, which contributed to accelerating the rise in prices in Europe to heights unprecedented since decades, while interest rates were raised at a brisk pace to curb inflation.
The previous test, in 2021, took place in a context of “low for a long time” interest rates.
The new test, the largest to date, is based on Russia cutting off its last gas supplies to the European Union, which would send energy prices skyrocketing and push inflation in the bloc to high. 9.7%, against a peak of 10.6% last October.
Stress tests have become standard practice for banks to undergo since their bailouts following the 2008 global financial crisis.
According to the EBA, the new test, developed with the help of the ECB, covers 70 banks in the union, 20 more than in 2021, representing 75% of the bloc’s total banking assets.
“The test imagines an adverse scenario linked to a hypothetical significant worsening of geopolitical tensions, accompanied by a rise in commodity prices and a resurgence of the COVID-19 epidemic,” writes the EBA in a press release.
This would translate into a 6% decline in GDP, soaring unemployment, falling property prices, gas supply cuts, and persistently high inflation and interest rates over a period of time. three years, until 2025.
The results by bank, which will not mention a pass or a failure in this test, will be published at the end of July.
This test contrasts with the current outlook of the ECB, which expects inflation to fall to 6.3% this year and 3.4% next year. The ECB also forecasts an acceleration in economic growth, which would increase from 0.5% this year to 1.9% in 2023.
(Reportage Huw Jones, with Balazs Koranyi in Frankfurt; French version Claude Chendjou, edited by Blandine Hénault)
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