Moody’s: EU banks are broadly resilient to EBA’s severe stress test scenario

The European Banking Authority’s (EBA) July 29 stress test results show that most banks in the European Union rove to be resilient under adverse conditions, marking a significant improvement upon the results of the EBA’s similar test in 2014, said Moody’s Investors Service.

The stress test exercise covered 51 European banks and highlights potential capital pressures under both mild and severely stressed economic conditions.

The results will inform the Supervisory Review and Evaluation Process (SREP), the European regulators’ annual in-depth evaluation of each bank’s risk exposure. This, in turn forms the basis of supervisors’ decisions on bankspecific minimum capital — or Pillar 2 — requirements.

“The majority of European Union banks have robust capital levels in the adverse scenario,” said Katharina Barten, a Senior Vice President at Moody’s. “Of the 51 tested banks, 43 maintained common equity tier1 (CET1) ratios above 8%, and with just one exception, they all maintained positive CET1 ratios, with the lowest at 6.1%.”

The results show that the 51 participating banks display greater resilience to stressed conditions than the 2014 group, according to the rating agency. This is down to an improvement in bank capital levels in most European banking systems since year-end 2013.

“For many EU banks, higher starting-point capital ratios have offset the harsher macroeconomic assumptions and higher revenue pressures in the adverse scenario for the 2016 stress test, as well as the inclusion of additional risk categories, specifically conduct and foreign-exchange risk,” explained Barten.

For 14 of the 51 tested banks, however, the adverse scenario impacted the CET1 capital by more than 500 basis points. This was mostly related to credit-related losses which — at EUR 349 billion — accounted for the bulk of simulated losses in the adverse scenario, though key drivers do vary across banks.

Only one bank of the tested sample, though, had a negative CET1 in the adverse scenario — Italian lender Banca Monte dei Paschi di Siena S.p.A (MPS). Moody’s noted, however, that Italian banks had very different outcomes in the test. The Italian banks’ stressed CET1 ratios in the adverse scenario range from -2.2% for MPS, to 10.2% for Intesa Sanpaolo SpA. Four of the five participating banks show results above 7.0% and are within Moody’s expectations for this group.

The results also highlight major differences in the relative strength of banking systems across the EU, with the strongest banks by average system CET1 ratio mostly located in northern countries, particularly in Scandinavia. Banks in Austria, Ireland and Italy came out under the severe stress scenario as less resilient — the key drivers are domestic market pressures for the Irish and Italian banks and higher credit risk of crossborder activities for Austrian banks.

Dutch, Spanish, and German banks had satisfactory results under the stress scenario and the UK banks’ results were varied, partly reflecting commercial property exposures.