BaFin and Bundesbank Publish Results of Stress Test for LSIs
BaFin and Deutsche Bundesbank published the results of the 2019 stress testing exercise for less significant institutions (LSI). The stress test was conducted on nearly 1,412 small and medium-size German credit institutions that are under direct national supervision, constitute approximately 89% of all credit institutions in Germany, and cover about 38% of the assets in the banking system. Bundesbank and BaFin will use the results of the stress test to determine the pillar 2 guidance.
The supervisory authorities defined several stress scenarios for the institutions to use. The institutions simulated their earnings situation and resilience for the period between 2019 and 2021, in each case using a baseline scenario and a stress scenario. The stress scenario anticipated a severe slowdown in the economy, during which interest rate risks, credit risks, and market risks arose, among other things. New to the 2019 stress test was the modeling of the banks’ statements of profit or loss, based on a crisis scenario defined by the supervisors.
The results show that the profitability of small and medium-size banks and savings banks in Germany is low. The prospect of a prolonged period of historically low interest rates makes it very likely that profitability will decrease further. On an average, the institutions anticipate an increase in the common equity tier 1 (CET 1) capital from 16.5% to 16.8% by 2023. However, a third of the institutions expect CET 1 capital to fall. This is based primarily on the significant increase in risk-weighted assets, which is due to growing business volume and higher risk exposure. The longer the low interest rate environment continues, the more difficult it is for the institutions to build up capital. Despite this, the institutions are still able to continue to build up surplus capital, just to a lesser extent. With regard to residential and commercial real estate, the survey highlighted the need for standardized data collection on real estate financing. Analyses of over 100 banks and savings banks regarding their credit underwriting standards, excluding commercial real estate mortgage lending, indicated that credit underwriting standards were being relaxed.
Related Links
Keywords: Europe, Germany, Banking, Less Significant Institutions, Pillar 2, Basel III, Stress Testing, BaFin, Bundesbank
Featured Experts
María Cañamero
Skilled market researcher; growth strategist; successful go-to-market campaign developer
Amnon Levy
Financial researcher; authority in credit portfolio management and AI/ML, risk-based pricing, climate and credit, CECL/IFRS 9; credit and ALM
Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager
Related Articles
EBA Updates List of Validation Rules for Reporting by Banks
EBA issued a revised list of validation rules with respect to the implementing technical standards on supervisory reporting.
EBA Responds to EC Call for Advice to Strengthen AML/CFT Framework
EBA published its response to the call for advice of EC on ways to strengthen the EU legal framework on anti-money laundering and countering the financing of terrorism (AML/CFT).
NGFS Advocates Environmental Risk Analysis for Financial Sector
NGFS published a paper on the overview of environmental risk analysis by financial institutions and an occasional paper on the case studies on environmental risk analysis methodologies.
MAS Issues Guidelines to Promote Senior Management Accountability
MAS published the guidelines on individual accountability and conduct at financial institutions.
APRA Formalizes Capital Treatment and Reporting of COVID-19 Loans
APRA published final versions of the prudential standard APS 220 on credit quality and the reporting standard ARS 923.2 on repayment deferrals.
SRB Chair Discusses Path to Harmonized Liquidation Regime for Banks
SRB published two articles, with one article discussing the framework in place to safeguard financial stability amid crisis and the other article outlining the path to a harmonized and predictable liquidation regime.
FSB Workshop Discusses Preliminary Findings of Too-Big-To-Fail Reforms
FSB hosted a virtual workshop as part of the consultation process for its evaluation of the too-big-to-fail reforms.
ECB Updates List of Supervised Entities in EU in September 2020
ECB updated the list of supervised entities in EU, with the number of significant supervised entities being 115.
OSFI Identifies Focus Areas to Strengthen Third-Party Risk Management
OSFI published the key findings of a study on third-party risk management.
FSB Extends Implementation Timeline for Framework on SFTs
FSB is extending the implementation timeline, by one year, for the minimum haircut standards for non-centrally cleared securities financing transactions or SFTs.
