Published on Monday, August 14, 2023

Europe | European banking holds its ground

At the end of July, the European Banking Authority (EBA) published the results of its stress test on European banks. The aim of these tests is to assess the resilience of the institutions in the event of a severe recession scenario.

Key points

  • Key points:
  • Two scenarios are taken as a reference—a baseline and an adverse scenario—over a three-year horizon. For this year, the EBA has increased the sample of banks from 50 to 70 with respect to the 2021 test, covering 75% of total assets.
  • Among the developments this year, the EBA has given a new twist to the test's severity, confronting banks with the most stressed scenario in history.
  • To do so, the adverse scenario depicts a cumulative fall in GDP of 6% over the next three years, compared to the 3.6% of the test in 2021 and 2.7% in 2018. The results show a deterioration in the CET1 capital ratio of 459 basis points (bp) for European banks, a drop from 15% at the end of 2022 to 10.4% in 2025.
  • This is an improvement on 2021, when banks suffered a drop in capital ratio CET1 of 485 bp, thanks to a higher contribution from net interest income and improved asset quality.
  • Spanish banking sector outperformed its European peers, with a destruction of the CET1 ratio in the adverse scenario of 242 bp, improving on the 290 bp impact of the 2021 stress test. Also notable is the strong performance of Italian banks, whose ratio fell by 351 bp, compared with 559 bp in 2021.

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