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Stress tests show resilience of European banking system
The European Banking Authority (EBA) and the European Central Bank (ECB) this evening published the results of the European banking stress tests carried out recently. As the Dutch supervisory authority, De Nederlandsche Bank (DNB) endorses the conclusions of the EBA and ECB that the European banking system can withstand a challenging macroeconomic scenario.
In the three-year stress scenario, the Common Equity Tier 1 (CET1) capital ratio of the euro area banks at system level would fall by an average of 5.2 percentage points, from 15.1% to 9.9%. This
In the three-year stress scenario, the Common Equity Tier 1 (CET1) capital ratio of the euro area banks at system level would fall by an average of 5.2 percentage points, from 15.1% to 9.9%. This core capital ratio is a key measure of a bank’s financial soundness. Despite the overall resilience of the banking system, new challenges have emerged from the COVID-19 pandemic. The ECB therefore points out that banks need to ensure that they properly measure and manage credit risk.
The EBA and the ECB carry out a two-yearly stress test exercise to assess the resilience of the largest European banks, identify potential risks, inform supervisory decisions and promote market discipline. The 50 largest European banks participated in the EBA-coordinated exercise, including 5 Dutch banks: ING Bank, Rabobank, ABN AMRO, BNG Bank and NWB Bank. The ECB also carried out a stress test at 51 medium-sized banks in the euro area, including De Volksbank. This year, for the first time the ECB publishes selected information on this group of 51 medium-sized banks that are not part of the EBA sample.
The stress tests serve as input for the annual Supervisory Review and Evaluation Process (SREP). Furthermore, the quantitative impact of the adverse stress test scenario is a starting point for supervisors to determine the level of Pillar 2 Guidance (P2G). The P2G is an element of capital that tells banks how much capital they are expected to maintain in order to be able to withstand stressed situations. The ECB has decided that until at least the end of 2022 banks will be allowed to operate below the P2G and the combined buffer requirement in view of the COVID-19 pandemic.
Also read the press releases of the EBA and the ECB.
For more information, please contact Tobias Oudejans by telephone at +31 6 524 969 61