May 14, 2021

Banks will have to withstand a recession until 2023 to pass the ECB stress test


Correspondent in Berlin

Updated:

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Many European countries hope that 2021 will be the year of recovery, after the recession caused by restrictions to curb the pandemic. Others do not expect to recover until 2022, but banks will have to be able to withstand a recession scenario until 2023, in order to pass the stress tests designed by the ECB.

Under the conditions of these tests, which has released the European Banking Agency (EBA), the ‘adverse’ scenario they must be prepared for is a continued three-year recession duration, in an environment in which the coronavirus is still present as an element of uncertainty and in which the ECB keeps interest rates low or at zero. In this same scenario, confidence would continue to be negative and the economy would continue to contract until 2023, starting from an initial drop in European GDP of 6.9% in 2020, which would be followed by a negative 15% in 2021, -1.9% in 2022 and -0.2% in 2023. The total deviation on which this scenario is based is 12.9 percentage points in the European economy. Parallel to this three-year recession, the unemployment rate would increase by 4.7 percentage points to 12.1%.

If 2020 seemed like a terrifying year to us, the test scenario designed by the ECB far exceeds what has been seen so far, putting banks on the ropes. One of the great challenges for 50 European banks that will have to face these tests is the ability to withstand an impact on real estate prices of -16.1% for housing and -31.2% for commercial goods in the period from the end of 2020 to the end of 2023 The consequences would be very perceptible in the balance sheets of the examined banks, among which are BBVA, Santander, Sabadell and Bankinter. This would be joined by a 50% plunge in the share price in 2021 due to falling profitability and corporate bankruptcies.

In the particular case of Spain, the adverse scenario would mean a recession of 0.9% of GDP in 2021 and 2.8% in 2022, followed by a very slight recovery of 0.5% in 2023. Unemployment would increase by 6.1 percentage points in those three years, to 21.9% in 2023 and the value of real estate would plummet 17% for housing and 26.8% for commercial properties.

It should be noted that this hypothesis is a testing ground and does not respond to the official forecasts of the ECB, which wishes to subject the banks of the EU and Norway to an examination that goes far beyond expectations. The “non-adverse” scenario, and this one is much more likely to come true, contemplate that the EU would have a growth of 3.9% this year, 4.2% next year and 2.3% in 2023. The results of this evaluation study will be published at the end of July.

The ECB thus resumes its supervision tests of the banking system, after the fifth exercise of the stress tests that should have been carried out in the summer of 2020 It was canceled last March due to the outbreak of the epidemic. The regulator will use these exercises to check whether the capital buffers already established are sufficient and has not planned a particularly tough test due to the economic situation. The adverse scenario posed is in fact, in relative terms, less harsh than the one projected a year ago, which already included a cumulative GDP loss of 4.3 percentage points in three years. The starting point for 2020, however, does reflect the effects of the pandemic and it is much lower than the original.

The tests will be carried out at a sample of 50 banks out of the Twenty-seven, of which 38 are under the jurisdiction of the Single Resolution Mechanism (SSM). In total, the entities chosen, which are always at the highest level of consolidation possible, represent 70% of the EU bank assets, in terms of total assets at the end of 2019. In the testing methodology, the EBA specifies that moratoriums should not be taken into account in the banks’ projections, while overdue loans guaranteed by the public sector should always be replaced with said guarantee to calculate the projections.

For its part, the ECB has informed in a statement that, in parallel with the stress tests coordinated by the EBA, it will carry out similar stress tests for 53 who are under your supervision but they do not enter the sample chosen by the institution. These parallel tests will use the same methodology and the same scenarios, although they will include “Elements of proportionality”. Banking groups will have to estimate the impact of the adverse scenario on their balance sheets and submit the results to the competent authorities and the EBA itself, which will review the responses and publish the final results on July 31.

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