FRANKFURT (MNI) – The following is a verbatum text of the joint
press release from the Bundesbank and BaFin regarding the results of
the EU-wide stress test for Germany:
German banks prove to be robust and resilient
Average tier 1 capital ratio of the German banking system up by
almost 2 percentage points in the last three years
Solvency assured, with tier 1 capital ratio just over 8.9%, even given
sharp decline in growth and shifts in the yield curve
In addition, German banks cope very well with the simulated drop in
government bonds prices paired with rise in risk premiums, tier 1
capital ratio in this scenario 8.5%
HRE is the only German bank to fall short of the 6% tier 1 capital
ratio in the most severe stress scenario
On 17 June 2010, the heads of state or government of the European
Union resolved to publish results of the EU-wide stress tests carried
out by the Committee of European Banking Supervisors (CEBS) in
cooperation with the national supervisory authorities and the ECB. The
objective of the stress test exercise is to make transparent the
resilience of the European banking system in the event of an economic
downturn and of negative financial market developments (in particular, a
drop in the value of European government bonds).
At the same time, the number of tested countries and banks compared
with the first ever stress test conducted at CEBS level last year was
increased considerably. A total of 91 credit institutions from 20 member
countries took part in this EU-wide stress test exercise, representing
65% of the EU banking system in terms of total assets (link to CEBS
website: http://www.cebs.org/News–Communications/Latest-news/CEBS-
statement-on-key-features-of-theextended-
EU-.aspx).
The 14 participating banks from Germany represent more than 60% of
the total assets of the German banking system including UniCredit Bank
AG, which participated in the consolidated stress test of its Italian
parent.
It must be borne in mind that stress tests constitute only
hypothetical (“what if”) analyses of negative developments. As such,
they must not be confused with forecasts of future capital requirements.
Similarly, the markets’ expectation that the banks differentiated by
business structure show higher tier 1 capital ratios than those called
for under regulatory requirements refer to the banks’ actual tier 1
capital base and not to the imputed capital ratios calculated according
to the stress tests.
Scenarios
In conducting the EU-wide stress test, a distinction is made
between a benchmark scenario and two stress scenarios.
The macroeconomic benchmark scenario is based on the European
Commission’s spring economic forecasts for 2010 and 2011, which was
overly pessimistic from today’s point of view, covering areas such as
gross domestic product, unemployment and housing prices. By contrast,
the current Bundesbank and ECB projections paint a picture of economic
developments for 2010 which is clearly more positive than the benchmark
scenario used in the EU stress tests.
Amongst other things, the EU stress scenarios assume a slowdown in
euroarea economic activity for 2010 and 2011 by a cumulative 3.0
percentage points, with German economic activity to drop by as much as
3.3 percentage points (measured as the deviation from the benchmark
scenario). This restrictive assumption on which the EU stress tests are
based is further highlighted by the fact that the stress scenarios
assume negative growth rates for the euro area as a whole in both years
and for Germany in 2011. This constitutes a double dip scenario, which
is highly unlikely as things stand at present.
Moreover, in the first stress scenario a distinct increase in the
yield curve with a simultaneous flattening is assumed. A marked
deterioration of four credit rating notches, cumulated over two years,
was simulated for securitisations. In a supplementary stress scenario, a
rise in risk premiums for European government bonds is assumed. The
simulated spread increases go beyond the considerable hikes witnessed at
the beginning of May 2010.
Please see CEBS website (link: http://www.c-ebs.org) and ECB
website (link: http://www.ecb.int) for more details on the scenarios and
parameters.
On the whole, the assumptions for the macroeconomic shock in the EU
stress scenarios are more severe than those used in the stress tests
conducted in the USA in the first half-year of 2009. In the US stress
test exercise, the aggregate deviation of economic growth rates from the
expected basic economic path for the years 2009 and 2010 was 2.9
percentage points. Under the EU stress tests, moreover, all
participating banks had to take into consideration not only the effects
of financial market upheavals on their trading book but also the
consequences of rising risk premiums on European government bonds. In
contrast, for the US stress test only five banks which were particularly
active in trading had to additionally factor in trading book losses.
Results
A credit institution is deemed to have passed the test if its tier
1 capital ratio does not drop below 6% even in the most severe stress
scenario. Measured by this criterion, the German banking system has
shown itself to be robust and proved its resilience even under very
pessimistic assumptions. Even in the extreme scenario, 13 of the 14
banks show a tier 1 capital ratio of more than 6%; nine of the
participating banks post a tier 1 capital ratio of more than 8% in this
particularly severe stress scenario, which is more than twice the
regulatory minimum.
The average tier 1 capital ratio of the 14 participating banks at
end-2011 according to the first stress scenario is 8.9%, and 8.5% when
the rise in risk premiums on European government bonds is also included.
This constitutes a decline of 1.6 and 2.0 percentage points respectively
compared with the end of 2009 (see annex for individual results).
One of the main reasons for the robust performance is that tier 1
capital has already been strengthened. Over the last two years, the
German banks have undertaken considerable efforts to clean up their
balance sheet and to obtain capital injections from owners and
government bodies within the framework of the Financial Market
Stabilisation Act (Finanzmarktstabilisierungsgesetz). The tier 1 capital
ratio of the German banking system as a whole has risen from 9.0% at the
beginning of 2008 to currently 10.8%.
In absolute figures, the 14 German banks participating in the
stress test show aggregate tier 1 capital of E146 billion and E139
billion in the respective stress scenarios at the end of 2011, compared
with E150 billion at the end of 2009. The change in tier 1 capital is
due primarily to the losses induced by the assumed shocks in their
banking book financial assets totalling E36.7 billion, the estimated
trading book losses totalling E5.8 billion and in the supplementary
stress scenario additional losses resulting from the increase in
yields on European government bonds totalling E8.9 billion. These must
be counterbalanced against (cautiously estimated) expected
pre-impairment income (including operating expenses) totalling E43.6
billion and the banks’ other reserves. The risk-weighted assets of the
banks participating in the stress test rose from a total of E1,428
billion to E1,637 billion, due primarily to the pessimistic assumptions
regarding rating migrations of securitisation positions and to
scenario-induced increases in the probability of default and loss given
default ratios for the banking book exposures.
Only one bank, Hypo Real Estate Holding AG, posts a tier 1 capital
ratio of less than 6% in the supplementary stress scenario in one of the
two years in question. Here, too, an immediate need for capital would
arise only if the hypothetical stress scenario actually did materialise:
this bank complied with the regulatory minimum tier 1 capital ratio,
even in the most severe stress scenario. Hypo Real Estate Holding AG is
currently undergoing a far-reaching restructuring process under the
close surveillance of its sole owner, the Financial Market Stabilisation
Fund (SoFFin). A deconsolidated environment (“Abwicklungsanstalt”) has
already been established in accordance with section 8a of the Financial
Market Stabilisation Act although this could not yet be taken into
consideration in the stress test analysis to which risk positions
totalling approximately E210 billion are to be transferred shortly. With
that, an important step ensuring the ongoing viability of Hypo Real
Estate Holding AG will have been taken.
[TOPICS: M$$EC$,M$X$$$,M$$CR$,MT$$$$,M$G$$$]
