European Banks Face Capital Shortfall of €496 Billion in Stress Test

 

LONDON/FRANKFURT - The European Union's banking watchdog announced on Friday that three banks failed to meet the binding capital requirements in a recent stress test, resulting in a theoretical wipeout of 496 billion euros ($546 billion) from their capital buffers.

 

Bank stress tests have become a crucial feature in the EU and the United States since the 2008 global financial crisis, as taxpayers had to bail out undercapitalized lenders. These tests are now part of routine supervision to ensure that banks can withstand economic downturns and stressed market conditions.

 

Conducted by the European Banking Authority (EBA), the latest stress test covered 70 banks, with an increase of 20 banks compared to the previous test in 2021. Among these, 57 banks were from the euro zone, overseen by the European Central Bank, collectively representing approximately 75% of banking assets in the EU.

 

The results of the stress test brought attention to several German lenders, which showed relatively modest capital cushions. Out of the 14 German banks tested, 8 fell below the EU average for the Common Equity Tier 1 (CET1) and leverage ratio, while 6 performed above the average. Notably, those above the average were mainly subsidiaries of U.S. banking giants such as Goldman and JPMorgan, or financing arms of companies like Volkswagen Bank.

 

La Banque Postale of France experienced a nearly total wipeout of its capital in the adverse scenario, but the bank emphasized that the test did not consider a new accounting rule that would have moderated the impact of market shocks.

 

The EBA did not disclose the names of the three banks that fell short of the requirements.

 

Termed the toughest test yet by the watchdog, the stress test examined the impact of a three-year scenario until 2025, taking into account credit, market, and operational risk losses on a bank's mandatory core capital buffer. The test scenario included a cumulative 6% economic growth slump and significant declines in property prices.

 

At the beginning of the test, banks had an average buffer of 15% of their risk-weighted assets. However, the losses incurred during the test amounted to 496 billion euros, leading to a depletion of capital buffers by 459 basis points, resulting in an average of 10.4% by the end of the third year of the stress test.

 

Overall, the stress test outcomes underscore the importance of banks maintaining adequate capital reserves to weather potential economic challenges and market uncertainties.

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