Stress test in Europe: German banks worse than average


Stress test in Europe
German banks worse than average

The EBA examines dozen financial institutions from 15 European countries. The result of the stress test: Everyone would probably survive an economic crisis after the corona pandemic. Deutsche Bank was hit hardest among the local institutions.

Europe’s banks are, by and large, robustly positioned to weather a new economic crisis. The European Union’s banking supervisors have come to this conclusion after their latest crisis test, the results of which were published by the EBA. In a hypothetical crisis scenario, the institutions would lose almost a third of their capital buffers. Nevertheless, the EU banking sector as a whole would remain above the 10 percent mark with the core tier 1 capital ratio as a buffer for possible setbacks. On the basis of their balance sheet for the Corona crisis year 2020, the supervisors had the financial institutions calculate how much capital buffers would shrink by the end of 2023 if the pandemic and economic downturn came to a head and the EU economy collapsed by 3.6 percent.

In addition, a whole bunch of unfavorable developments was assumed in the stress test, which is considered to be particularly harsh: rising unemployment, collapse in property prices, sharply falling foreign demand, further falling market interest rates. In this hypothetical crisis scenario, the EU banking sector would lose a total of 265 billion euros in capital buffers according to EBA calculations. The core tier 1 capital ratio as a buffer for crises would decrease from 15 percent at the end of 2020 to 10.2 percent at the end of 2023.

According to the EBA, loan defaults would be decisive

The European Banking Authority (EBA) examined 50 banks from 15 European countries, which represent 70 percent of the EU banking market. These included seven German institutes: BayernLB, Commerzbank, Deutsche Bank, DZ Bank, Landesbank Baden-Württemberg, Landesbank Hessen-Thuringia, and Volkswagen Bank. 38 of the 50 institutes in the EBA test are banks from the euro area and therefore come under the supervision of the European Central Bank (ECB). In parallel to the EBA test, the ECB banking supervisory authority scrutinized a further 51 banks from the euro area that it supervised directly.

Overall, the seven German banks in the stress test performed slightly worse than the European average. The hardest hit the hypothetical crisis scenario among the local financial institutions, the Deutsche Bank, as can be seen from the data. According to this, the core capital ratio of the largest German financial institution in the event of an economic downturn, coupled with various other stress factors, would decrease from a good 13.6 percent at the end of 2020 to a good 7.4 at the end of 2023. At Commerzbank, the core capital ratio shrank in the negative scenario to 8.5 percent from 13.2 percent in 2020.

According to the EBA, the main reason for the amalgamation of the capital buffers in the hypothetical crisis scenario would be an increase in loan defaults. The ongoing low interest rates are also weighing on the balance sheets. The EBA pointed out that banks that are mainly active in their home market were hit harder in the stress scenario.

Tests are not without controversy

There were no diarrhea in this year’s test. Money houses that have fared worse must expect that supervisors instruct them to increase capital buffers and set limits on the distribution of dividends. Since the financial and economic crisis in 2008 and 2009, supervisors around the world have regularly used such stress tests to determine how vulnerable banks would be in the event of a crisis. Such tests and the deductions from them are not undisputed, because which risks are weighted and how heavily in the hypothetical scenarios ultimately lies in the hands of the supervisors.

The new edition of the European bank stress test should actually be carried out in 2020. But in order not to burden the institutes with further tasks in the middle of the Corona crisis, the EBA postponed the examination for a year.

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