Three banks from the European Union failed to meet binding capital requirements in a stress test that saw a theoretical €496-billion ($546-billion) wiped from their buffers, the bloc’s banking watchdog said on Friday.
Bank stress tests became a feature in Europe and the United States after the 2008 global financial crisis when taxpayers had to bail out some undercapitalised lenders. They are now part of routine supervision to ensure banks can still support the economy even in times of stressed markets.
The European Banking Authority (EBA) said the test covered 70 banks, 20 more than in 2021 with 57 from the euro zone whose test was overseen by the European Central Bank, representing about 75 per cent of banking assets in the EU.
The outcome shone a spotlight on several German lenders in particular, who ended the test with modest capital cushions.
Of the 14 German banks tested, 8 were below the EU average for CET1 and leverage ratio, while 6 were above. Those that were above were primarily subsidiaries of U.S. banking giants, like Goldman and JPMorgan, or financing arms of companies like Volkswagen Bank.
La Banque Postale of France, whose capital was nearly totally wiped out in the adverse scenario, said the test did not reflect a change to a new accounting rule which would moderate the impact of market shocks.
The EBA did not name the three banks that fell short.
In what the watchdog described as its toughest test yet, it examined the impact of a three-year scenario to 2025 of credit, market and operational risk losses on a bank’s mandatory core capital buffer. It included economic growth slumping by a cumulative 6 per cent, and big falls in property prices.
Banks began the test against theoretical shocks with an average buffer of 15 per cent of their risk weighted assets, and totted up losses of €496-billion during the test, depleting capital buffers by 459 basis points to an average of 10.4 per cent by the end of the test’s third year.
This was a smaller reduction than last time round, partly due to better profitability, the impact of regulatory reforms since the global financial crisis, and better quality of assets at the start of the test, the EBA said.
The European Banking Federation, an industry body, said the results reaffirmed the resilience of the EU banking sector.
Although there is no pass or fail mark, banking supervisors, use the results to assess if banks need to hold extra capital in addition to their mandatory core buffer, known as total SREP capital requirement or TSCR.
“Under the adverse scenario, all banks except three meet the TSCR,” the EBA said.
It said four banks did not meet their mandatory leverage ratio requirement, a broader measure of capital to total assets.
The watchdog said that in year three of the test, 37 banks fell below capital levels that trigger curbs on payouts.
Deutsche Kreditwirtschaft, an umbrella association representing the German financial industry, said the results proved that German banks were “resilient” but it criticized the ECB’s approach.
“The results of many European banks were worsened by markups applied by the ECB in later steps of the process and the stress-related capital losses were significantly increased,” it said. “This approach jeopardizes the confidence of market participants.”
An ad-hoc analysis of banks’ holdings of bonds against a backdrop of rapidly rising interest rates showed that unrealised losses totalled €73-billion in February, but this could more than triple if the bloc’s economy suffered severe stress.