EU’s prime regulator says area’s banks are ‘sturdy’

Obtain free Financial institution stress checks updates

We’ll ship you a myFT Each day Digest e mail rounding up the most recent Financial institution stress checks information each morning.

Solely three of Europe’s 70 greatest banks could be compelled to boost capital in a doomsday state of affairs, the EU’s prime banking regulator mentioned on Friday, because it praised the “sturdy” nature of the bloc’s banking sector greater than a decade after the monetary disaster. 

France’s government-controlled Banque Postale was the worst performer within the EBA stress state of affairs, underneath which its capital would have been utterly worn out.

The most recent iteration of the European Banking Authority’s stress checks — designed to evaluate whether or not banks are ready to resist extreme however believable crises — confirmed the 70 banks examined would lose a mixed €500bn over three years underneath a disaster state of affairs.

These losses, triggered by a mix of hits to financial output, employment and property costs in an setting of upper inflation and rates of interest, would push solely three of the banks under their minimal capital ranges, the EBA mentioned. 

No less than 37 extra would face restrictions on their payouts to shareholders by 2025 in the event that they had been hit by essentially the most extreme headwinds modelled within the decade-and-a half the checks have been run. These situations embody a cumulative 6 per cent fall in EU GDP over the three years, a 5.7 per cent enhance in unemployment throughout the EU, persistently excessive inflation and a property crash.

The 70 banks would swing from a mixed annual revenue of €128bn in 2022 to losses of €139bn the next yr, earlier than returning to a lot decrease earnings within the subsequent two years.

“As a basic precept the outcomes present that they [the EU’s banks] are sturdy,” José Manuel Campa, the EBA’s chair, advised the Monetary Instances, including that whereas the findings had been “reassuring” they had been primarily based on “only one state of affairs, one of many many situations that may occur”. 

The outcomes observe comparable workouts, with comparable outcomes, within the UK and US. In mid July, the Financial institution of England declared the UK’s prime eight banks could be “resilient to financial shocks. The most important 23 US banks acquired a clear invoice of well being from the Federal Reserve’s stress checks in late June, prompting the biggest to announce larger shareholder payouts. 

The three units of checks targeted on banks’ capital and so didn’t seize the liquidity stresses that had been blamed for a spate of US financial institution failures earlier this yr and contributed to the collapse of Credit score Suisse in March. 

Campa mentioned there was a “lot of liquidity” in Europe’s banking system. The EBA and European Central Financial institution individually reviewed the extent of unrealised losses that Europe’s banks are nursing of their authorities bond portfolios. Fears about all these losses had been a part of what triggered considerations about US regional banks in March and April. 

Banque Postale mentioned that 60 per cent of its stability sheet was the insurer CNP Assurances, which it acquired final yr, giving it a “larger sensitivity of solvency to sure market shocks”.

It mentioned that underneath the brand new IFRS 17 accounting guidelines that got here into power this yr there would have been a “extra average” fall in its capital ratio to six.8 per cent within the stress take a look at. The financial institution, one of many greatest in France with €777bn of property final yr, mentioned its widespread fairness tier one ratio — the benchmark capital gauge — was 18 per cent firstly of the yr, effectively above its minimal requirement of 8.38 per cent.

The EU train discovered that the 70 banks had unrealised losses of simply €75bn on their holdings of bonds, an quantity described as “comparatively manageable” by Campa. 

“European banks have confirmed to be resilient towards real-life occasions, from the Covid pandemic, the warfare in Ukraine, and the current turmoil inside the US regional banking system,” mentioned Wim Mijs, chief govt of the European Banking Federation foyer group. 

“The 2023 outcomes, due to this fact, supply a possibility to replicate on the stress take a look at train and sign the preparedness of European banks.”

The European Central Financial institution ran the identical stress take a look at on a wider group of 98 eurozone banks, which discovered that general they had been “resilient” regardless of 9 falling under minimal capital necessities. The train additionally discovered 53 could be compelled to limit payouts to shareholders, together with dividends.

The ECB mentioned the outcomes would “feed into the continuing supervisory dialogue” by which financial institution supervisors “talk about potential measures to deal with any shortcomings”. But it surely added: “Recognized capital shortfalls is not going to, nevertheless, result in rapid recapitalisation actions.”