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

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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