Bank stress test

Stress scenario is plausible in view of Raimund Röseler. Apart from that, however, other scenarios are also conceivable.

Date: 07.12.2018

The results of the 2018 EU-wide stress test published by the European Banking Authority (EBA) on 2 November (see info box “EBA Stress Test”) did not hold any surprises for German banks. “In the scenario of a severe economic downturn for Germany, all German banks were shown to be resilient”, said Raimund Röseler, Chief Executive Director of Banking Supervision, on the same evening in a BaFin press release (only available in German). As expected, in the first week of November the local business press focussed on the capital ratios of the German participants. When assessing the capital ratios, it is also interesting to take a closer look at how the test is calibrated.

At a glance:EBA Stress Test

The stress test coordinated by the EBA examined the resilience of the 48 largest European banks during times of crisis. The stress scenario was provided by the European Systemic Risk Board (ESRB) and the baseline scenario by the ECB. Of the institutions tested, 33 are subject to the Single Supervisory Mechanism (SSM). Eight of these SSM banks are German credit institutions – the Report names them in alphabetical order: Bayerische Landesbank, Commerzbank AG, Deutsche Bank AG, DZ BANK AG Deutsche Zentral‐Genossenschaftsbank, Landesbank Baden‐Württemberg, Landesbank Hessen‐Thüringen Girozentrale AdöR, Norddeutsche Landesbank ‐ Girozentrale and NRW.BANK. The latest EBA EU-wide stress test was already performed in 2016 (see BaFinJournal of August 2016, only available in German).

“The stress simulated is a single macroeconomic scenario”, Röseler said with a view to the stress scenario (“adverse scenario”) that the European Systemic Risk Board (ESRB) had developed. The scenario among other things made certain assumptions for trends in gross domestic product (GDP), the inflation rate, unemployment and capital market interest rates which differ from one country to the next and served as guidance for the respective institutions.

Whereas the rise in the unemployment rate in the EBA’s adverse scenario was more significant in Germany and the decline in residential property prices slightly more pronounced than in other Eurozone countries, a uniform EU-wide trend in risk premiums for companies was chosen. Here, no distinction by country was made. The sharp drop in equities in Germany in the stress scenario was slightly below the Eurozone average. The trend in inflation in Germany over the scenario period was more or less in line with that of the Eurozone.

“As plausible as the current EBA stress test is: many other scenarios are certainly also conceivable“, Röseler said. With its open economy, the exporting nation Germany had been significantly impacted in the simulation by the assumed slump in the economy. “If the stress were to originate in the political fragmentation within the EU and not, as assumed by the ESRB, in the USA, the distribution of the shocks impacting the individual countries would certainly be different”, he stated, thus giving a further example of what from the German viewpoint is a relatively drastic simulation.

Under the stress scenario, Germany’s GDP – on a cumulative basis over three years – contracts by 3.3 per cent. Historically, Germany has not yet experienced such a drop in GDP over a consecutive three-year period. Such an assumption is therefore more plausible for other countries.

Unlike the stress scenario, the baseline scenario reflected the actually assumed economic trend of the countries in the European Union as well as in the rest of the world over the coming three years. The baseline scenario was calibrated by the European Central Bank (ECB). Parallel to the EBA stress test it performed its own stress test for the Supervisory Review and Evaluation Process (SREP). The SREP stress test likewise exposed 54 significant institutions (SIs), including eleven German banks, to the EBA stress test scenarios. The methods and processes applied in the SREP stress test are basically similar to the guidance for the EBA stress test, but with simplifications having been made in some cases.

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