German banks proved to be robust in the EU-wide stress tests conducted by the European Banking Authority (EBA) and the European Central Bank (ECB). “They would consistently meet the high capital requirements, even in a severe economic crisis,” said Joachim Wuermeling, the Bundesbank Executive Board member responsible for banking supervision. As part of the tests, banks had to simulate a scenario in which they faced, amongst other things, an economic slump, rising unemployment and a drop in property and equity prices, with the EBA stress test’s adverse scenario assuming that economic output in the European Union would shrink by 3.6% overall up to and including 2023.

German banks strongly reliant on interest business

In this scenario, the common equity tier 1 (CET1) capital ratio at the European institutions examined by the EBA fell by an average of 4.85 percentage points to 10.2%. At the medium-sized European banks that underwent the ECB’s SSM-wide stress test, the CET1 capital ratio contracted by 6.8 percentage points on average to 11.3%. The CET1 ratio in the EU banking sector thus remained above the 10% mark overall as a buffer for potential setbacks, with German banks’ capital depletion slightly higher than the EU average. According to Mr Wuermeling, this is a result of the German economy’s high level of exports and German banks’ strong reliance on interest business. “This is no cause for alarm, nor is it a weakness; it simply reflects the greater vulnerability of the German economy in a global recession,” Mr Wuermeling remarked. Overall, European credit institutions performed marginally better with regard to their CET1 ratio at the end of the three-year stress horizon than during the last tests in 2018, even though the tests were tougher this time. For one thing, the assumptions for the scenarios were more severe than in 2016 and 2018; moreover, the tests were carried out in a crisis year in which banks had to form a high level of risk provisions and write down assets. “The fact that the stress test was not conducted in a normal economic cycle but instead against the backdrop of a real crisis owing to the coronavirus pandemic made it extremely tough for the banks,” emphasised Mr Wuermeling.

EBA and ECB test roughly 100 European institutions

A total of 16 banks from Germany participated in the stress tests conducted by the EBA and the ECB, 7 of which took part in the EBA test – Deutsche Bank, Commerzbank, DZ Bank, Helaba, LBBW, BayernLB and Volkswagen Bank. The EBA tested a total of 50 European banks, while the ECB conducted a parallel stress test of 51 institutions using a comparable methodology. For the most part, these were medium-sized banks (including nine German institutions) which were not tested by the EBA. It was not a pass or fail exercise for the banks. However, capital depletion in the adverse scenario is relevant when it comes to setting supervisory capital expectations. “Qualitative insights from the stress test are taken into account in the Supervisory Review and Evaluation Process,” Mr Wuermeling noted.