2023-07-28 16:41:03
The solidity of the banks of the Old Continent has several explanations. Adobe Stock
Institutions in France finished in last place in the test conducted by the European Banking Authority.
What would happen to European banks if geopolitical tensions escalated and caused a severe global recession? This is the question to be answered by the stress tests put in place by the ECB and the European Banking Authority (EBA), the supervisors of the sector. This year, 98 establishments in the euro area (80% of the sector, including 41 medium-sized banks) had to study the effects on their accounts and capital of a prolonged period (between 2023 and 2025) of economic crisis with inflation and rising interest rates. After the US banking crisis and the near bankruptcy of Credit Suisse, these valuations were eagerly awaited, especially as the economic situation remains uncertain. The results are reassuring.
«Tests show that the eurozone banking sector might withstand a severe economic slowdown“, underlines the ECB. Under a disaster scenario, 70 banks, including the 57 largest in the euro zone, would lose 271 billion euros in capital by 2025, notes the EBA. This would be less than in 2021. Their equity ratio “tough“, a key indicator for measuring financial strength, would fall from 15% to 10.4%. But the banks of four countries (Spain, the Netherlands, Germany and France) would fall below the 10% mark. The tricolor networks would even finish in last place with a “hard” equity ratio of 9.3% at the end of these three years of turbulence!
Read also“By continuing to hike rates like the Fed, is the ECB making a mistake?”
Be that as it may, the solidity of the banks of the Old Continent has several explanations: they generated very good profits in 2022, they are more profitable than in the past and better capitalized. They also carried out significant work to clean up their bad debts. And the rise in rates would be beneficial to them, especially those lending at variable rates. As a result, European institutions would be able to absorb 496 billion euros in losses related to credit and financial markets, according to the EBA.
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