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.
Keywords: Europe, Germany, Banking, Less Significant Institutions, Pillar 2, Basel III, Stress Testing, BaFin, Bundesbank
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