Last Friday, after the closure of the financial markets, the European Banking Authority (EBA) published the results of the stress tests submitted to by 48 banks on the continent (covering 70 percent of the assets in the European banking system) in recent months.
In this fourth wave of tests, the Banking Authority subjected the European institutions to scenarios of severe economic stress: including a 2.7 percent drop in European GDP between 2018 and 2020, accompanied by a rise in the unemployment rate of 3.3 percentage points, economic risks related to Brexit or a fall in property prices.
The aim was to assess whether banks had sufficient capital reserves to absorb these kinds of shocks. Overall the banks performed better than they did in the last stress test conducted in 2016, thanks to a continued increase in their solvency ratios (which measure equity against distributed loans) over the past two years.
However, there were some surprises in the results. The EBA ranked the institutions according to the losses that would would be incurred by shareholders and reserve profits in the case of an economic shock. Among the lowest ranked banks are three major UK banks, Lloyds Banking Group, Barclays and Royal Bank of Scotland (RBS). The last two had already had problems passing stress tests conducted by the Bank of England in 2017.
French and Italian banks came out well overall; however, some of Italy’s most troubled lenders such as Monte dei Paschi were not included in this round of testing.
Germany’s oldest lender, Deutsche Bank, barely made the grade, ranking 40th out of 48. After three years of losses in a row, the institution still struggling. But its chief financial officer, James von Moltke, said that there was no question of changing “our management of the bank after stress tests,” adding that Deutsche Bank’s internal methodologies differed from those used by the EBA.
The outcome of the tests, the most stringent conducted by the EBA since the establishment of this exercise in 2009, will allow bank supervisors to identify necessary improvements, while the ECB, which supervises banking in the eurozone, said it would use the results to set capital requirements for each institution in its annual review in January.