FEELING THE STRESS

The EBA administered stress test results have just been announced, providing a common level playing field for regulators to asses credit, market and operational risk losses for over 50 large banks. Rather than a simple pass/fall exercise, these tests estimate impact to capital, or common equity tier one (CET1), a risk-weighted capital ratio. The exercise validates that capital levels of banks have materially grown since the crisis, by 400bps since 2011. On average, the stress tests result in an adverse impact of 380bps for the population of banks. Italian lender Monte dei Paschi performed poorly relative to other banks in the exercise, with Unicredit, Barclays and Deutsche Bank also suffered material impacts in this imaginary sets of stress tests. Some note that the stress tests were still less rigorous than those used recently in the US (WSJ, July 29th 2016).  

While shocks to credit, real estate, inflation, conduct risk and the like are very good starting points, I wonder if more attention should be placed on interest rate risk, not just the risk of rates going up but also negative rates and their impact upon bank net interest margins. It will be interesting to review the stress results analysis in detail (found here at http://storage.eba.europa.eu/documents/10180/1532819/2016-EU-wide-stress-test-Presentation-to-analysts.pdf) for the consequence of continued low and even negative rates upon bank performance.

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