European banks strong enough to weather another financial storm

Posted on Jul 30, 2021, 8:12 PM

What if the sky fell on their heads? The European Central Bank (ECB) and the European Banking Authority (EBA) published the results of the 2021 edition of their banking stress tests on Friday at the very end of the day. The exercise, which has become common for ten years, consists of subjecting the banks to a catastrophic economic scenario, “running the models”, and seeing if they would withstand the shock.

For the ECB the answer is simple. The test shows that “a banking system in the euro zone resilient in the face of a difficult macroeconomic scenario,” says the institution. “The scenario adopted is even more difficult this time around than in the 2018 test, and the banks are just coming out of a difficult 2020. In spite of this demanding framework, they rather obtained good performances in the test, underlined as of Thursday Luis de Guindos, vice-president of the ECB in an interview with Handelsblatt.

Some have suffered more

For the 89 large institutions supervised by the ECB, this tornado – marked by even lower interest rates, and sluggish growth by 2023 – would lead to a fall of a third of the banks’ capital ratio. They would still maintain, after this shock treatment, a “hard” equity ratio (CET1) of 9.9% on average, a level that the authorities consider visibly reassuring.

For the European Union as a whole, such an economic crisis would blow up 265 billion euros of capital, reveals the EBA for its part, not preventing banks from maintaining a CET1 ratio above 10%. However, this level is an average: in total, twenty of the fifty banks tested by the EBA would fall below 10% at the end of the three years. And if the authorities refute the idea that this test could be “failed or successful” (“pass or fail” in the jargon of the authorities), some have suffered more.

Negative equity

Starting with Monte dei Paschi di Siena (BMPS). The Sienese establishment would end in negative equity at the end of 2023, according to the test. What shed light on the surprise announcement of discussions between the Italian State and UniCredit, with a view to selling it its 64% in BMPS. Other rather national players Sabadell (in Spain) and banco BPM (in Italy) point to around 7% of CET1 at the end of 2023.

In the heavyweight category, the underperformance comes from Deutsche Bank (7.4% of CET1 at the end of the test) and Societe Generale (7.5%). The continental subsidiary of HSBC, established in France, (»HSBC Continental Europe) does even less well with 5.9% on arrival. These institutions do not have to automatically recapitalize, but the ECB takes the results into account in the individual examination of each bank, carried out each year (“SREP”). As for the other French banks, they all held up above 10%, with the prize going to the Crédit Mutuel group, which posted 13.4%.

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