As the ECB releases its findings, German banks face a “serious challenge.”
The COVID-19 epidemic is posing a “serious challenge” to German banks, according to a recent stress test conducted by the European Central Bank (ECB).
The purpose of the test was to see how well European financial institutions are prepared for future problems caused by the increasing Covid epidemic. The test found that the scenario “is a huge challenge, especially for German banks,” according to Andreas Dombret, a former member of the Bundesbank board of directors. “Because of the uncertainty regarding the long-term repercussions of the Covid epidemic, banks have already entered the stress test with greater risk provisioning, therefore the starting point of the stress test, December 31, 2020, was already in the crisis,” Mr Dombert explained.
However, the expert pointed out that the tests are typically overlooked because they are based on hypothetical situations that anticipate severely bad economic outcomes.
“This is purposefully overstated, and only realistic in the rarest of unusual cases,” he remarked.
“Moreover, the assumptions differ substantially from one test to the next.”
“A comparison with prior study results is therefore only possible to a very limited extent, and banks can only be compared to each other to a very limited extent due to their diverse business models,” Mr Dombert stated.
Even if the stress test included more than 70% of European bank assets, it would merely indicate a trend rather than a final assessment of the European banking system’s health.
The test was halted last year due to the coronavirus epidemic, which Mr Dombert believes should be taken into account.
“The scenario envisions a sharp increase in bankruptcies, a collapse in property prices, and a big decline in foreign demand,” he stated.
“In addition, the test replicates short-term rates being greater than long-term rates.
“As a result, the assumptions have a considerably greater negative impact than in earlier scenarios and provide a significant challenge, particularly for interest-sensitive banks in Germany’s export country.”
According to Mr. Dombert, the test’s conclusions were extremely limited.
He said that this was because “stress testing are already part of supervisors’ and banks’ everyday lives.”
“They regularly model unfavorable situations to assess the durability of particular banks and loan portfolios,” the expert continued.
“A great deal of data is thus already available. “Brinkwire Summary News” is the distinction.