The European Banking Authority (EBA) has revealed the results of the 2016 stress test, conducted among 51 banks located in the EU and the European Economic Area, concluding that the banking sector had significantly shored up its capital base.
The test was the first major health check on the European banking sector in two years, covering about 70% of banking assets in each jurisdiction, covering a slightly smaller sample than in 2014, when 123 banks were included in the test.
Bank performances were measured against an adverse scenario including negative GDP growth rates over a three year time scale, however, they did not factor in a scenario of sovereign debt defaults in the Eurozone. Moreover, in contrast to the 2014 test, the most recent one did not include a pass or fail threshold.
The EBA concluded that compared to the last test in 2014, banks had on average increased their CET 1 ratio to 13.2% as of end 2015, representing a capital increase of €180bn over the past two years.
“The outcome demonstrates resilience in the EU banking sector as a whole thanks to significant capital raising. The results for individual banks vary significantly and will inform supervisory discussions in the SREP to understand each banks’ resilience to shocks, after taking into account their specific circumstances and credible management actions” the report stated.
While average results were generally positive, the test did flag up weaknesses of individual banks, particularly those of Italian Banca Monte dei Paschi di Siena, which in the case of an adverse GDP growth scenario would fail to maintain a positive CET1 ratio.
For the German banking sector, Deutsche Bank and Commerzbank were flagged up as the most vulnerable institutions to a sustained fall of GDP levels, with CET1 ratios in an adverse scenario of 7.80% and 7.42%, compared to a European average of 9.4.
Rabobank was the weakest performer in the Netherlands with a CET1 ratio of 8.10% in a stress scenario, while French Société Générale S.A. would have a CET1 ratio of 7.50% in an adverse stress scenario.
British and Irish capital ratios were also far from stable, with Barclays PLC at 7.30% and Allied Irish Bank at a mere 4.31% and the Bank of Ireland at 6.15%.