Participating Dutch banks do well in European stress test

Press release
Date 15 July 2011

ING Bank, Rabobank, ABN AMRO and SNS Bank recently participated, under the supervision of de Nederlandsche Bank (DNB), in the stress testing exercise of the European Banking Authority (EBA). In all, 90 European banks participated in the EU-wide stress test.

All four participating Dutch banks performed well above the minimum standard, defined as a core tier 1 ratio of 5.0 per cent. The average  core tier 1 capital ratio of the four Dutch banks at end-2010 stood at 10.6 per cent of their risk-weighted assets. In the stress test, the average core tier 1 ratio of the four participating banks decreased to 9.4 per cent. One may conclude that the Dutch banking industry performed strongly in the recent EU-wide stress test.

In the stress test banks modeled the implications of a hypothetical stress scenario, to see whether they would be able to bear the ensuing losses. The criterion applied was the impact on banks’ core tier 1 ratio, a solvency indicator in which only the highest quality part of banks’ capital is counted. All in all, under the adverse scenario, Dutch banks would write down EUR 19 billion of their assets, about one quarter of their core tier 1 capital. They are most sensitive to losses on their commercial real estate portfolios. Under the stress scenario the rates Dutch banks have to pay on their financing increase by one half or more. Notwithstanding the substantial impact of the stress scenario, each individual bank remains amply capitalised.

The results of the exercise were thoroughly examined for correctness and consistency by both DNB and the EBA. The individual participating Banks will disclose details about their own results. Also, they will provide details on the magnitude of their exposures to individual EU countries, broken down by sector: sovereign bodies, banks, consumers, enterprises and commercial real estate. Moreover, banks will disclose their government bond holdings, differentiated by country and by maturity.

Chart Development of the core tier 1 ratio under the adverse scenario

Scenario and methodology

The stress test assumes two macroeconomic scenarios for the years 2011 and 2012 compiled by the ECB and the European Commission: a baseline scenario and an adverse scenario. The baseline scenario assumes economic growth developing according to end-2010 projections. Under this scenario, the average core tier 1 capital ratio of the four banks increases to 12.1 per cent.  

The fictive adverse scenario is the crux of the stress test. For theNetherlands, it assumes a two-year economic recession. As a result, unemployment rises strongly amid declining residential and commercial real estate prices. Meanwhile, banks’ financing costs increase due to a flattening interest rate curve and rising tensions in the interbank market. Also, the scenario involves shocks to banks’ trading portfolios and additional provisions against losses from exposures to European governments and banks. 

The participating banks assessed the impact of the scenario on their solvency positions and profitability using their own internal models, after which the results were reviewed byDNBand the EBA. The testing exercise was performed on the basis of firms’ consolidated balance sheets as at end-2010. More information on both scenarios and the methodologies applied is publicly available from the EBA website.