The testing scenarios factor in economic shocks around a fall in GDP, rising unemployment, and falling property prices
The tests show that overall EU banks would take a €265 billion hit in a test of their resilience to economic shocks, which would still leave them with two-thirds of their buffers intact, the EBA said.
The testing scenarios factor in economic shocks around a fall in GDP, rising unemployment, and falling property prices until the end of 2023.
Under the harshest scenario spanning three years to 2023, which baked in a prolonged fallout from COVID, the aggregate core ratio of capital to risk-weighted assets fell by nearly 500 basis points, pushing the ratio down to 10.2% from 15%.
The tests indicated that AIB’s capital reserves would fall from 15.5% at the start of this year to 12.8% at the end of 2021, and to 8.8% by the end of 2023, in the event of an economic shock under an ‘adverse scenario’.
Whereas under the same conditions Bank of Ireland’s capital reserves, which were just below 13.4% at the end of last year, would fall to 8.4% by the end of 2021, and to 8.05% by the end of 2023.
While slightly below the average for all of the banks measured, both AIB and Bank of Ireland perform favourably when compared with some other EU lenders.
Investment banks Deutsche Bank and Societe Generale, in the midst of turnarounds, both performed below average under the adverse scenario, with scores of 7.56% and 7.73% respectively.
Whereas all of Italian lender Monte dei Paschi’s capital was wiped out under the same scenario, with the bank ending the test with a core capital ratio of minus 0.1% under the adverse scenario.
The results of the tests, which were delayed from last year due to COVID-19, are seen as critical to banks resuming dividend payouts, which were barred during the pandemic in order to conserve capital.
Commenting on the 2021 EU-wide and the SSM stress test results, the Central Bank’s Director of Credit Institutions Supervision, Mary-Elizabeth McMunn said: “Overall, the impact of the stress test is more severe than the results from the 2018 exercise, reflecting a more severe scenario.
“Nevertheless, even though uncertainties currently remain high, the benefits of resilience built up in recent years are evident, with banks having sufficient capital to absorb the impact of the severe scenario.”
After an ECB ban on dividends last year, which is set to be lifted, some banks this week have already begun guiding shareholders on dividends.
The EBA tested the resilience of 50 top lenders to economic shocks. The banks account for 70% of EU banking assets.
More domestic focused banks suffered bigger hits to capital in the test compared with their cross-border peers.
The overall result is seen by EU regulators as being in line with stress tests by the Federal Reserve and the Bank of England.
Although there is no pass or fail mark in the EU test, the results will be used by the European Central Bank to determine capital requirements for lenders it supervises.
Stress tests, now held every two years in the EU, were introduced annually in the aftermath of the global financial crisis over a decade ago, which forced taxpayers to bail out undercapitalised banks.
Today’s test was the first that did not include British lenders due to the UK leaving the EU last December.