What if the sky fell on their heads? The European Central Bank (ECB) and European Banking Authority (EBA) published the results of the 2021 edition of their banking stress tests on Friday at the end of the day. The exercise, which became popular a decade ago, is to subject banks to a catastrophic economic scenario, “running the models,” and seeing if they can withstand the shock.

For the European Central Bank, the answer is simple. The test shows that “the eurozone banking system is resilient in the face of a difficult macroeconomic scenario,” says the foundation. The adopted scenario is more difficult this time around than it was in the 2018 test, and banks are just emerging from a tough 2020 year. Despite this demanding framework, they did well in the test, Luis de Guindos, ECB Vice President confirmed in an interview with Handelsblatt on Thursday.

Some suffered more

For the 89 large institutions overseen by the European Central Bank, this hurricane — which is characterized by lower interest rates, and slow growth by 2023 — will result in a decline of one-third of the proportion of bank capital. And they will still, after this shock treatment, maintain a “solid” (CET1) equity ratio of 9.9% on average, a level the authorities consider distinctly reassuring.

For the EU as a whole, such an economic crisis would blow up €265 billion of capital, EBA law reveals on its part, and does not prevent banks from maintaining a CET1 ratio above 10%. However, this level is considered average: in total, twenty of the fifty banks tested by the EBA will drop below 10% at the end of the three years. And if the authorities refuted the idea that such a test could be “fail or pass” (“successful or pass” in the parlance of the authorities), some suffered even more.

negative equity

Starting with Monte dei Paschi di Siena (BMPS). According to the test, Sienese will end up with passive capital at the end of 2023. What shed light on the sudden announcement of discussions between the Italian state and UniCredit to sell it 64% in BMBS. Other national players Sabadell (in Spain) and Banco BBM (in Italy) report around 7% of CET1 at the end of 2023.

In the heavyweight category, poor performance comes from Deutsche Bank (7.4% of CET1 at the end of the test) and Societe Generale (7.5%). HSBC’s continental subsidiary, which is incorporated in France (“HSBC Continental Europe”) underperformed by 5.9% on arrival. These institutions do not have to recapitalize automatically, but the ECB takes the results into account in each bank’s individual examination, which is conducted each year (“SREP”). As for the other French banks, they all held above 10%, with the award given to the Crédit Mutuel group, which scored 13.4%.