The results of the stress test show that German banks would be stable even in the event of a very severe economic downturn, said Raimund Röseler, Chief Executive Director of Banking Supervision at BaFin. This is positive news given the great macroeconomic uncertainty at present. Supervisors nevertheless need to remain very vigilant, commented Bundesbank Vice-President Claudia Buch, whose remit includes the Directorates General Banking and Financial Supervision, with respect to the results for the German institutions. 

The 57 largest euro area banks participated in the stress test coordinated by the EBA. This included 14 German institutions. In parallel, the ECB examined other medium-sized institutions under its direct supervision that did not participate in the EBA stress test. Generally speaking, this test is similar to the EBA stress test, although some methodological aspects were simplified for the 41 banks examined by the ECB – eight of which were German institutions. Together, these 98 banks cover around 80% of all banking sector assets in the euro area.  

Scenario: adverse scenario with high inflation

Both stress tests consist of a baseline scenario and a hypothetical adverse scenario. Key elements of both scenarios are predetermined changes in gross domestic product (GDP), the inflation rate, the unemployment rate and capital market rates, amongst other variables. The baseline scenario's assumptions are based on the economic developments in the EU countries and the rest of the world that were considered most likely in December 2022 over a three-year horizon.

The adverse scenario is characterised by geopolitical tensions, high inflation and rising interest rates, as well as a very sharp fall in GDP. Banks had to simulate how this would impact their profitability and risk situation as well as key supervisory indicators such as their CET 1 ratio.

A total of 22 German significant institutions (SIs) participated in this year’s stress test – 14 of them in the EBA stress test and eight in the Single Supervisory Mechanism (SSM) stress test conducted by the ECB. The German institutions were able to cope well overall with the adverse macroeconomic scenario. Their sound capital base was helpful here in cushioning the hypothetical losses in the adverse scenario.

Mixed picture

In a European comparison, the stress test for German institutions shows a mixed picture: In the adverse scenario, the CET 1 ratio of German institutions would have fallen somewhat more sharply on average than that of other European institutions. The stress effect for German banks was therefore somewhat higher overall than the European average.

When assessing the results, the comparatively severe scenario for Germany should be taken into account. Owing to its dependence on exports and energy, the German economy could be more vulnerable in a global recession than other European economies. For example, GDP in Germany is assumed to decline by 6.4% over three years, whereas the decline in GDP in the euro area is assumed to be just 5.9%. This gives rise to a comparatively high stress effect for German institutions. Owing to their good capitalisation, German banks would be able to cope with losses in the adverse scenario, emphasised Bundesbank Vice-President Buch with regard to the particular conditions of the stress test. BaFin Chief Executive Director Röseler added: This is good news. We will now examine the results of the stress test in detail. 

Supervisors will pay particular attention to institutions that proved conspicuous in the stress test. This will include an intensified dialogue between the respective institution and supervisors. The quantitative results of the stress test also form the basis for the bank-specific own funds recommendation. Qualitative findings from the stress test – for example with regard to the required data quality – are also taken into account in the supervisory process and can also lead to higher own funds requirements. The stress test is not a “pass-or-fail” exercise.

BaFin and the Bundesbank provide support for the stress tests

Background information: The joint stress test conducted by the EBA and the ECB takes place every two years. The EBA, the ECB, the European Systemic Risk Board and the national supervisory authorities work closely together in this respect. BaFin and the Bundesbank provide additional support, both in relation to methodological refinements and the implementation of the stress test. BaFin and the Bundesbank also support the ECB in updating the recommendations to banks on how much capital they should maintain under Pillar 2. Experts from BaFin and the Bundesbank also help the ECB on-site – especially in carrying out quality assurance for the data submitted by banks.