ECB: Stress test shows im­proved re­silience

Financial Mirror (Cyprus) - - FRONT PAGE -

The re­sults of EU-wide bank stress tests show that euro area banks im­proved their re­silience and over­all su­per­vi­sory cap­i­tal ex­pec­ta­tions will re­main broadly sta­ble com­pared to 2015, the Euro­pean Cen­tral Bank (ECB) said.

The stress test co­or­di­nated by the Euro­pean Bank­ing Author­ity (EBA) for 51 banks in the Euro­pean Union in­cluded 37 sig­nif­i­cant in­sti­tu­tions di­rectly su­per­vised by the ECB, cov­er­ing about 70% of bank­ing as­sets in the euro area. The 37 ECB su­per­vised banks en­tered the test with an av­er­age Com­mon Eq­uity Tier 1 (CET1) cap­i­tal ra­tio of 13%, an im­prove­ment on the 11.2% in the last EU-wide stress test in 2014, the ECB said.

In the ad­verse sce­nario, the av­er­age cap­i­tal de­ple­tion was 3.9 per­cent­age points, higher than the 2.6 per­cent­age points in the 2014 stress test. This was partly due to a more strin­gent stress test method­ol­ogy and a tougher ad­verse sce­nario that cov­ered again a three-year pe­riod and as­sumed static bal­ance sheets. Thanks to a higher cap­i­tal level and other im­prove­ments since 2014, the fi­nal av­er­age CET1 ra­tio in the ad­verse sce­nario was none­the­less higher at 9.1%, com­pared to 8.6% in 2014.

With one ex­cep­tion, all banks show CET1 cap­i­tal lev­els well above the bench­mark of 5.5% used in 2014 in the hy­po­thet­i­cal ad­verse sce­nario, the ECB said. This re­flects the ro­bust­ness of over­all cap­i­tal lev­els at the banks tested in the EBA led stress tests.

“The re­sults re­flect the sig­nif­i­cant amount of cap­i­tal raised and the ad­di­tional bal­ance sheet re­pairs by the banks over the past two years,” said Daniele Nouy, Chair of the ECB’s Su­per­vi­sory Board. “The bank­ing sec­tor to­day is more re­silient and can much bet­ter ab­sorb eco­nomic shocks than two years ago.”

In the stress test’s ad­verse sce­nario, the cap­i­tal de­ple­tion, which was on av­er­age 3.9 per­cent­age points, was due to var­i­ous risk driv­ers:

- Credit risk con­trib­uted on av­er­age 3.8 per­cent­age points to the over­all CET1 de­ple­tion.

- Mar­ket risk con­trib­uted on av­er­age 1.1 per­cent­age point, pre­dom­i­nately as a re­sult of reval­u­a­tion losses on as­sets booked at fair value.

- Op­er­a­tional risk con­trib­uted on av­er­age 0.9 per­cent­age point due to loss pro­jec­tions for con­duct risk, an el­e­ment in­tro­duced in the 2016 ex­er­cise for the first time.

In ad­di­tion, a mix of other fac­tors pos­i­tively or neg­a­tively in­flu­enced the cap­i­tal de­ple­tion, in­clud­ing net in­ter­est in­come, in­come from fees and com­mis­sions and ad­min­is­tra­tive ex­penses. In­come fac­tors were stressed as well. In par­tic­u­lar, net in­ter­est in­come was sig­nif­i­cantly stressed in the ad­verse sce­nario, with an im­pact of 1.3 per­cent­age point when com­pared to the base­line sce­nario.

Although the stress test is not a pass/fail ex­er­cise it will, how­ever, con­trib­ute in a non-mech­a­nis­tic way as one of sev­eral in­put fac­tors to de­ter­mine Pil­lar 2 cap­i­tal in the ECB’s over­all Su­per­vi­sory Re­view and Eval­u­a­tion Process (SREP).

Pil­lar 2 cap­i­tal con­sists of two parts: Pil­lar 2 re­quire­ments and Pil­lar 2 guid­ance. The stress test re­sults are used by the ECB in Pil­lar 2 guid­ance, tak­ing ad­di­tion­ally into ac­count con­se­quences of the static bal­ance sheet as­sump­tion and banks’ mit­i­gat­ing man­age­ment ac­tions among other fac­tors.

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