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

Emil Lopez
Credit risk modeling advisor; IFRS 9 researcher; data quality and risk reporting manager

James Partridge
Credit analytics expert helping clients understand, develop, and implement credit models for origination, monitoring, and regulatory reporting.
Previous Article
Agustín Carstens of BIS Examines Global and EU Financial IntegrationRelated Articles
FINMA Approves Merger of Credit Suisse and UBS
The Swiss Financial Market Supervisory Authority (FINMA) has approved the takeover of Credit Suisse by UBS.
BOE Sets Out Its Thinking on Regulatory Capital and Climate Risks
The Bank of England (BOE) published a working paper that aims to understand the climate-related disclosures of UK financial institutions.
OSFI Finalizes on Climate Risk Guideline, Issues Other Updates
The Office of the Superintendent of Financial Institutions (OSFI) is seeking comments, until May 31, 2023, on the draft guideline on culture and behavior risk, with final guideline expected by the end of 2023.
APRA Assesses Macro-Prudential Policy Settings, Issues Other Updates
The Australian Prudential Regulation Authority (APRA) published an information paper that assesses its macro-prudential policy settings aimed at promoting stability at a systemic level.
BIS Paper Examines Impact of Greenhouse Gas Emissions on Lending
BIS issued a paper that investigates the effect of the greenhouse gas, or GHG, emissions of firms on bank loans using bank–firm matched data of Japanese listed firms from 2006 to 2018.
HMT Mulls Alignment of Ring-Fencing and Resolution Regimes for Banks
The HM Treasury (HMT) is seeking evidence, until May 07, 2023, on practicalities of aligning the ring-fencing and the banking resolution regimes for banks.
BCBS Report Examines Impact of Basel III Framework for Banks
The Basel Committee on Banking Supervision (BCBS) published results of the Basel III monitoring exercise based on the June 30, 2022 data.
PRA Consults on Prudential Rules for "Simpler-Regime" Firms
Among the recent regulatory updates from UK authorities, a key development is the first-phase consultation, from the Prudential Regulation Authority (PRA), on simplifications to the prudential framework that would apply to the simpler-regime firms.
DNB Publishes Multiple Reporting Updates for Banks
DNB, the central bank of Netherlands, updated the list of additional reporting requests and published additional data quality checks and XBRL-Formula linkbase documents for the first quarter of 2023.
NBB Sets Out Climate Risk Expectations, Issues Reporting Updates
The National Bank of Belgium (NBB) published a communication on climate-related and environmental risks, issued an update on XBRL reporting