EU’s top regulator says region’s banks are ‘robust’

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According to the European Union's leading banking regulator, out of the 70 largest banks in Europe, only three would be obliged to increase their capital in an extreme and catastrophic situation. This acknowledgment came as the regulator commended the strong and resilient state of the European banking industry, even after enduring the consequences of the financial crisis over ten years ago.

The government-managed Banque Postale of France stood as the poorest performer in the EBA stress test scenario, where its capital would have been entirely eradicated.

The most recent edition of the stress tests conducted by the European Banking Authority, which aim to evaluate the readiness of banks in dealing with possible severe crises, revealed that the 70 banks assessed would suffer a total loss of €500bn over a period of three years in a hypothetical crisis situation.

The EBA stated that only three banks would be pushed below their minimum capital levels due to these losses, which were caused by a combination of decreased economic output, employment, and property prices in a context of increased inflation and interest rates.

By 2025, a minimum of 37 additional companies would encounter limitations on their dividend payments to stockholders if they were impacted by the harshest challenges analyzed in the tests that have been conducted over the past fifteen years. These situations encompass a total decline of 6 percent in the GDP of the European Union over a span of three years, a 5.7 percent rise in unemployment throughout the EU, long-lasting elevated inflation, and a collapse in the property market.

The collective earnings of the 70 banks would experience a significant shift, transitioning from a combined profit of €128bn in 2022 to a detrimental loss of €139bn in the subsequent year. However, they would subsequently revert to generating much lower profits over the course of the next two years.

According to José Manuel Campa, the chair of the EBA, the outcomes indicate that the EU's banks are strong and steady in general. He mentioned to the Financial Times that although the findings were comforting, they were solely derived from a single scenario, among several possible scenarios that could occur.

The findings mirror comparable activities and consequences observed in both the United Kingdom and the United States. During the middle of July, the Bank of England affirmed that the top eight banks in the UK would possess the ability to withstand economic disruptions. Likewise, in late June, the Federal Reserve's stress tests concluded that the largest 23 banks in the US were in good financial standing, leading to increased dividends for their shareholders.

The three rounds of examinations centered on the financial strength of banks and therefore did not include the evaluation of their ability to cope with liquidity challenges, which were found responsible for a series of bank collapses in the United States earlier this year and also played a role in the downfall of Credit Suisse in March.

Campa mentioned that there is a significant amount of available funds in the banking system of Europe. The EBA and the European Central Bank conducted separate assessments to evaluate the extent of unrealized losses that European banks have incurred in their holdings of government bonds. The concerns surrounding these losses were one of the factors that raised anxiety about regional banks in the United States during the months of March and April.

Banque Postale stated that the majority of its assets were tied to the insurance company CNP Assurances, which they purchased in the previous year. This has led to an increased vulnerability to specific market fluctuations in terms of solvency.

According to the newly implemented IFRS 17 accounting regulations, it indicated that there would have been a "less severe" decrease in its capital ratio to 6.8 per cent during the stress test. The financial institution, which is among the largest in France with €777bn of assets in the previous year, stated that its common equity tier one ratio, which is the primary measure of capital strength, was 18 per cent at the beginning of this year, significantly exceeding the minimum requirement of 8.38 per cent.

The examination conducted by the European Union discovered that the 70 banks had incurred unrealized losses of only €75bn on their bond investments. Campa, in his assessment, deemed this amount to be "fairly controllable."

According to Wim Mijs, the head of the European Banking Federation lobbying organization, European banks have shown their ability to withstand real-world occurrences, such as the Covid-19 pandemic, the conflict in Ukraine, and the recent instability in the banking system of the United States.

The findings from 2023 provide a chance to contemplate the stress test procedure and indicate the readiness of European banks.

The European Central Bank conducted a similar stress test on a broader selection of 98 banks in the eurozone. The results revealed that, in general, these banks demonstrated strong endurance, although nine of them did not meet the minimum capital requirements. Additionally, the test highlighted that 53 banks would be compelled to limit payouts to their shareholders, including dividends.

The European Central Bank (ECB) mentioned that the outcomes will contribute to the continuous monitoring conversation, during which banking supervisors will talk about possible actions to rectify any deficiencies. However, it emphasized that any identified deficiencies in capital will not result in immediate actions for recapitalization.