Published on Monday, August 9, 2021

Europe | European banking: increasing the stress on an already stressed scenario

On July 30, the European Banking Authority (EBA) published the results of the stress tests it regularly carries out on the major European Union banks. The top 50 banks (covering 70% of total EU banking assets) were analyzed for a baseline and an adverse scenario over a three-year horizon.

Key points

  • Key points:
  • This year, the tests have been particularly severe, both in terms of the initial macroeconomic assumptions and of the final impact on capital with the application of an additional shock to the 2020 scenario — already deteriorated as a result of the pandemic.
  • European banks start from a CET1 fully loaded (FL) capital ratio of 15% in December 2020, a high level compared to the last few years. Under the adverse scenario, the ratio would reduce by 495 bps in 2023 versus 395 in the previous stress test — the highest in the years covered by the EBA.
  • For the first time, the ECB also published its results of a further 51 banks. The capital deterioration of this extended sample was even greater (520 bps), giving a final CET1 FL ratio of 9.9% — a level that demonstrates the overall strength of the sector, according to the supervisor.
  • Of particular note in relation to Spanish banking, is its greater resilience in terms of lower capital destruction in the adverse scenario: 303 bps vs. 485 bps in the EU.
  • The increase in the severity of stress test scenarios, year after year, and especially this year due to the pandemic, is not a trend that is exclusive to the EU, it can also be seen in other regions, for example in the UK and the US.

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