(Finance) – The results of the European Banking Authority (EBA) stress test show that the European banks remain resilient in an adverse scenario which combines a severe EU and global recession, rising interest rates and higher credit spreads. The stress test involved 70 banks from 16 EU and EEA countries, covering 75% of EU banking sector assets.
European banks remain resilient in the adverse scenario, when they absorb more than 496 billion euros of losses. The stress test results indicate that on average banks end the year under the adverse scenario with a Common Equity Tier 1 (CET1) above 10% and show that banks can continue to support the economy even in times of severe stress. “L’current uncertainty in the macroeconomic environment shows the importance of remaining vigilant and the need for supervisors and banks to be prepared for any potential worsening of current economic conditions,” the report reads.
The adverse scenario in the 2023 EU-wide stress test implies persistent and higher inflation in the EU, rising interest rates and credit spreads, severe recessions in the EU and globally, with significantly high unemployment and a substantial decline in asset prices. The adverse scenario assumes that real GDP in the EU decreases cumulatively by 6% over the three-year horizon. This is more severe than previous EBA stress tests.
In the adverse scenario, the fully loaded CET1 capital decreases by €271 billion over the three-year period of the exercise and is expected to stand at €1,011 billion at the end of 2025. The CET1 weighted average capital ratio falls from 15% fully loaded at the end of 2022 to 10.4% at the end of 2025. “While the decline in the aggregate capital ratio is smaller this year than in the previous stress test, dispersion across banks has increased,” it points out.
There capital depletion in the adverse stress test scenario it is 459 basis points, resulting in a fully loaded CET1 ratio at the end of the scenario of 10.4%. “Higher earnings and better asset quality into early 2023 both help moderate capital depletion under the adverse scenario,” it noted.