EU’s top regulator says region’s banks are ‘robust’

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Only three of Europe’s 70 biggest banks would be forced to raise capital in a doomsday scenario, the EU’s top banking regulator said on Friday, as it praised the “robust” nature of the bloc’s banking sector more than a decade after the financial crisis. 

The latest iteration of the European Banking Authority’s stress tests — designed to assess whether banks are prepared to withstand severe but plausible crises — showed the 70 banks examined would lose a combined €500bn over three years under a crisis scenario.

Those losses, triggered by a combination of hits to economic output, employment and property prices in an environment of higher inflation and interest rates, would push only three of the banks below their minimum capital levels, the EBA said. 

At least 37 more would face restrictions on their payouts to shareholders by 2025 if they were hit by the most severe headwinds modelled in the tests’ decade-plus history. Those headwinds include a cumulative 6 per cent fall in EU GDP over the three years, a 5.7 per cent increase in unemployment across the EU, persistently high inflation and a property crash.

The 70 banks would swing from a combined annual profit of €128bn in 2022 to losses of €139bn the following year, before returning to much lower profits in the next two years.

“As a general principle the results show that they [the EU’s banks] are robust,” José Manuel Campa, the EBA’s chair, told the Financial Times, adding that while the findings were “reassuring” they were based on “just one scenario, one of the many scenarios that can happen”. 

The results follow similar exercises, with similar outcomes, in the UK and US. In mid July, the Bank of England declared the UK’s top eight banks would be “resilient to economic shocks. The biggest 23 US banks got a clean bill of health from the Federal Reserve’s stress tests in late June, prompting the largest to announce higher shareholder payouts. 

The three sets of tests focused on banks’ capital and so did not capture the liquidity stresses that were blamed for a spate of US bank failures earlier this year and contributed to the collapse of Credit Suisse in March. 

Campa said there was a “lot of liquidity” in Europe’s banking system. The EBA and European Central Bank separately reviewed the level of unrealised losses that Europe’s banks are nursing in their government bond portfolios. Fears about these types of losses were part of what triggered concerns about US regional banks in March and April. 

The EU exercise found that the 70 banks had unrealised losses of just €75bn on their holdings of bonds, an amount described as “relatively manageable” by Campa. 

“European banks have proven to be resilient against real-life events, from the Covid pandemic, the war in Ukraine, and the recent turmoil within the US regional banking system,” said Wim Mijs, chief executive of the European Banking Federation lobby group. 

“The 2023 results, therefore, offer an opportunity to reflect on the stress test exercise and signal the preparedness of European banks.”