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    CNB Publishes Results of Stress Tests on Banks and Insurers

    December 13, 2019

    CNB published the results of supervisory stress tests conducted on banks and insurance companies, using data as of the end of 2018. The results of the stress tests demonstrated that the two sectors are still prepared to withstand a deterioration in economic conditions. The supervisory stress tests will be conducted at two-year frequency, with CNB planning to conduct the next supervisory stress tests in 2021. However, CNB may revert to the annual stress test in the event of significant changes in the financial or macroeconomic situation or other material facts.

    For the supervisory stress tests of banks, CNB, for the second time, applied the EBA methodology, adjusted to the conditions of the Czech banking sector. The tests were extended from the largest banking groups, which were tested last year, to almost all banks subject to CNB supervision. Thus, the tested banks account for nearly 91% of the assets of the Czech banking sector (as compared to 76% last year). The tests covered credit, market, and operational risks; interest and non-interest income and expenses; and capital. The aggregate results of the supervisory stress tests of banks subject to CNB supervision confirmed that the banks are resilient to hypothetical adverse economic developments. The capital ratio of the part of the banking sector tested would drop to 14.8% under a stress scenario assuming a sizable decline in economic activity in the Czech Republic and abroad. However, it would remain well above the regulatory minimum of 8%. The resilience of banking groups is based mainly on their initial capital ratio, which amounted to 18.4% at the end of 2018. As usual, credit risk had the most significant impact of the risks under review.

    Additionally, 18 domestic insurance companies, which account for 98% of the domestic insurance market in 2018 based on gross premiums written, participated in the 2019 supervisory stress tests for insurance companies. The stress test assessed the impact of shocks for individual risks on each insurance company’s solvency ratio (that is, the ratio of eligible own funds to the solvency capital requirement). The focus was on testing the impact of investment risks, the risk of claims due to natural disasters, the risk of a decrease in non-life insurance premiums, and the risk of an immediate lapse of 10% of the life insurance portfolio of an insurance company. The aggregate results of the stress test demonstrated that the insurance sector had sufficient own funds to absorb relatively significant changes in risk factors at the end of 2018. The overall solvency ratio of the tested insurance companies was 157%, even after the application of shocks for market and insurance risks and was, thus, relatively high above the regulatory minimum of 100%. Out of the risks under review, equity risk and the risk of a drop in government bond prices had the largest impact.

     

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    Keywords: Europe, Czech Republic, Banking, Insurance, Stress Testing, Solvency Ratio, Credit Risk, CNB

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