German Banking Industry CommitteeStress testEuropean Union

2023 EU-wide stress test: capitalization of German institutions proves robust in a tough stress scenario

31.07.2023Press release
Cornelia Schulz
Steffen Steudel

The European Banking Authority (EBA) and the European Central Bank (ECB) have today published the results of their latest periodic stress test. The previous stress test had been conducted in 2021. From the end of January 2023, credit institutions simulated a baseline scenario and a pes-simistic three-year scenario assuming a severe macroeconomic down-turn. The outcomes of the simulation are used to calculate the individual recommendations for these banks’ regulatory capital. In view of recent turmoil and the continuing cycle of interest-rate increases, these out-comes will be of interest as indicators of the banks’ situation. 

Germany’s banks once again proved their resilience in this latest stress test. Although profitability has improved overall, Tier 1 capital fell once again in this latest stress test, albeit against the backdrop of an even tougher scenario. This scenario’s underlying assumptions include a 5.2 percent decline in German GDP for 2023 and a cumulative drop in real estate prices of more than 25 percent for residential properties and more than 30 percent for commercial properties. The scenario also as-sumes an equity market crash of more than 50 percent without any sig-nificant subsequent recovery. In addition, the scenario includes the unre-alistic assumption that the banks’ balance sheets remain unchanged, which equates to banks not taking any mitigating action as the stress scenario unfolds.

Alongside the stress test results, data on the performance of the individ-ual institutions’ bond portfolios was published today. This information is provided in order to enhance market transparency and is not part of the stress test itself. It should also be borne in mind that this data does not represent realized losses and paints an incomplete picture of the actual risk situation. In Europe, all institutions are subject to strict requirements concerning the management of interest-rate risk and they protect them-selves effectively against this type of risk. 

The DK takes a critical view of the ECB’s approach to this stress test. Add-ons applied by the ECB in subsequent process steps caused the re-sults of many European banks to deteriorate and led to a significant in-crease in stress-induced capital losses. In many cases, the methodologi-cal and economic reasons for these add-ons were not transparent to the affected banks. Consequently, the results at individual bank level are characterized by a significant degree of variation, which drastically limits their comparability. Market participants’ confidence in the stress test results, which rests on the consistent application of a transparent meth-odology, is being undermined by this approach. 

Along with the simplification of the EU-wide stress test, ensuring the comparability and transparency of the process and its outcomes should be a priority when it comes to the test’s further development. As in the previous test, the further stabilization of the stress test process – includ-ing associated communications – remains a more urgent concern than methodological adjustments.