Overall, Europe’s banks came through the most recent stress test by the bank supervisors better than they did two years ago. However, German banks were once again lagging behind. In particular, the cooperative DZ Bank and several state banks were among the weakest institutions in the stress test of the European Banking Authority (EBA). Deutsche Bank and Commerzbank fared better than they did two years ago, but the former still lags far behind in the rankings.
The scenario of the test envisaged an increase in geopolitical tensions accompanied by a resurgence of the corona pandemic. The consequences would be a slump in the economy, growing unemployment, high inflation and a collapse in the stock markets.
In the assumed scenario, the financial groups would cope with losses of 496 billion euros within three years. Although they would lose 271 billion euros in capital buffers, they could still support the economy even in such a serious economic crisis, the EBA said when presenting the results. In doing so, she had simulated a crisis scenario that was as severe as never before for the institutes.
Severe economic downturn assumed
According to the stress test, the CET1 capital ratio of the financial institutions would fall from 15 percent at the end of 2022 to 10.4 percent at the end of 2025 in the event of a crisis. The economic slump assumed in the current test was the strongest so far, it said. In the scenario, the economic output (GDP) of the EU countries will drop by a total of six percent in the years 2023 to 2025. The unemployment rate is up about 6 percentage points and the inflation rate is up to 3 percentage points higher than it would otherwise have been.
The EBA justified the fact that Europe’s banks are still performing better overall in terms of the core capital ratio than in the previous test from 2021 with the recently higher profits and a higher quality of the assets at the beginning of the test in early 2023. Nevertheless, given the major economic The EBA warned that we should remain alert to uncertainties and be prepared for a possible deterioration in the environment.
However, in the simulated crisis, three banks failed to meet the capital requirements applicable to them. The French Postbank lost all its core capital in the simulated crisis, and the ratio fell to zero percent. At the Irish subsidiary of the British bank Barclays, the rate fell by almost ten percentage points to 6.8 percent.
German money houses with mixed results
Things didn’t look much better at DZ Bank, the leading institute of the German cooperative banks. Their hard core capital ratio shrank to 7.0 percent in the stress test. The institute itself referred to the new accounting standard IFRS 17. This is of particular importance to it because of its insurance subsidiary R V. Under the new standard, DZ Bank would have achieved a rate of 9.0 percent in the test.
Landesbank Hessen-Thüringen (Helaba) and Norddeutsche Landesbank (NordLB) were also among the five weakest institutions in the EU – with a common equity tier 1 ratio of 7.6 percent each in the event of a crisis.
Things looked a bit better at Deutsche Bank. The core capital ratio fell to 8.1 percent. Commerzbank got off much better with 9.5 percent. For comparison: the Dutch ING was in between with 8.9 percent, the Spanish bank Santander with 10.3 percent around the European average, the Italian Unicredit with 12.5 percent well above it. The strongest German bank in the EBA test was again Volkswagen Bank with 14.7 percent, followed by Hamburger Sparkasse Haspa with 12.3 percent.
The EBA pointed out that three banks had performed particularly poorly. This has no direct consequences, because the test does not provide for failure in the actual sense. However, the supervisors could in future require the financial institutions concerned to strengthen their capital buffers.
“A positive message”
“The results of the stress test show that German banks would be stable even in the event of a very severe economic downturn,” said Raimund Röseler, Executive Director of the Financial Market Authority at Bafin. Bundesbank Vice President Claudia Buch saw the test results as “a positive message in view of the current great macroeconomic uncertainty”. Financial supervisors must also remain vigilant.
In the test, the European Banking Authority (EBA) examined 70 institutions with a view to their crisis resilience. The money houses come from 15 EU countries, plus the largest Norwegian bank DNB. According to the EBA, together they account for around 75 percent of the banking market in the EU and Norway. 57 of the 70 institutions in the EBA stress test are banks from the euro area and are therefore under the direct supervision of the ECB. This also subjected 41 other medium-sized financial institutions that it supervises to a stress test.
