E.uropa’s banks can survive a severe economic crisis due to their improved equity base. This is shown by the stress test results of the EU banking regulator EBA, which were published on Friday evening. 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 in the Common Equity Tier 1 capital ratio as a buffer for possible setbacks.
According to the Vice President of the European Central Bank (ECB), Luis de Guindos, the institutes have proven their worth in the supervisors’ latest stress test. “Europe’s banks are robust, they are resilient,” said the Spaniard before the publication of the results in the Handelsblatt. The statements of de Guindo and German banking supervisors already indicated a satisfactory result.
In addition, the ECB’s banking supervisory authority last weekend relaxed its strict requirements for dividend distributions from September, which would not have been the case if the crisis resistance tests had revealed deficiencies. German banking supervisors were also satisfied. According to her, the German banks would meet the high capital requirements even in a severe economic crisis. Deutsche Bank announced that it would come to a core capital ratio of 7.6 percent in the crisis scenario. Like Commerzbank, this is 8.2 percent below the average, but meets the minimum regulatory requirements.
50 banks from the EU were examined, including 38 from the euro area. Seven German banks took part in the EBA stress test: in addition to Deutsche Bank and Commerzbank, DZ Bank, Volkswagen Bank and the three Landesbanken BayernLB, Helaba and LBBW. In addition, the ECB examined 51 other institutes from the euro area, including nine German ones. According to bank supervisors, this year’s stress test was more difficult than the previous ones in 2016 and 2018. To make matters worse, the starting point was the balance sheets at the end of 2020, i.e. after the crisis year of the corona pandemic.
Deutsche Bank and others can significantly increase profits
The supervisors had the banks calculate how much the capital buffers would shrink by the end of 2023 if the pandemic and economic downturn came to a head. Compared to the end of 2020, the crisis scenario assumed a decline in economic output of 3.6 percent for both Europe and the eurozone. In addition, a bundle of unfavorable developments was assumed in the stress tests: rising unemployment rate, collapse in real estate prices, sharply falling foreign demand, further falling market interest rates.
The mostly good numbers of European banks in the second quarter also indicated robust stress test results. Institutions such as Deutsche Bank, the Italian Unicredit, the Spanish BBVA or the French BNP Paribas were able to increase their profits significantly, which was also due to the lower risk provisioning. Company insolvencies cannot be ruled out, should the spread of the delta variant of the coronavirus require further lockdown measures. So far, however, the risk situation has eased significantly in the wake of the economic recovery, which is having a positive effect on bank balance sheets.
However, in southern Europe, especially in Italy, many banks still carry legacy problems with bad loans on their balance sheets. This includes the Tuscan crisis bank Monte dei Paschi di Siena. Here it was expected that the stress test results should show billions in capital requirements. Unicredit, the parent company of Hypovereinsbank, is said to be interested in parts of the institute that has been caught by the Italian state.