EU-wide stress test: German institutions are resilient

The European Banking Authority (EBA) and the European Central Bank (ECB) have today published the results of their regular stress test. Since the start of the year, credit institutions have been simulating a baseline scenario and a pessimistic three-year scenario with a serious macroeconomic downturn. The results are used by the ECB to calculate the recommended prudential capital requirements for the individual institutions. The last stress test took place in 2023.

“German banks have shown themselves to be resilient – also in difficult stress situations,” said Heiner Herkenhoff, CEO of the Association of German Banks, this year’s coordinator of the German Banking Industry Committee (GBIC). The results of the stress test show that Tier 1 capital is falling overall. However, the scenario and the prescribed calculation methods are aimed at doing precisely this. For example, among other things, GDP in Germany is expected to fall by 3.6 percent in 2025 and cumulatively by almost eight percent by 2026. For comparison: In the scenario, the entire eurozone would have suffered a GDP slump of only slightly more than six percent.

The GBIC is critical of the requirement in this year’s stress test to calculate the results according to the rules and requirements for 2033, i.e. after the complete phase-in of CRR III. This time horizon does not fit with the scenario: Banks’ portfolios will anyway be different by then, since banks will respond accordingly to regulatory developments. The calculated results would never actually happen – not even if the stress scenario were to occur. Accordingly, the results are very different for the individual financial institutions, are not really comparable with one another and are, therefore, less meaningful.

Future EU-wide stress tests should focus on improving plausibility and simplification. To achieve this, future requirements should be geared more towards current realities.