During our recent webinar, “When Banks Default, How Much Can Be Recovered? One Year On”, one of the topics discussed compared the severity of stress tests conducted by various regulators globally, including both the Federal Reserve (the Fed) and the Bank of England (the BoE).
Since our webinar in February, the European Banking Authority (the EBA) has published their 2016 stress test methodology. This short blog compares these results, with those of other regulators, alongside S&P Global Market Intelligence stress tests and provides food for thought on the question of “How Secure and Robust are European Banks?”
2016 Stress Tests: EBA vs. The Rest
Beginning with a like-for-like comparison of the stresses applied by the Fed, the BoE, S&P Global Market Intelligence and the stresses applied by the EBA, we found that for the regions and countries presented in the table below it is clear that the EBA stress tests yield lower average bank Loss Given Default (LGD) estimates for senior unsecured creditors than both the Fed and S&P Global MarketIntelligence severely adverse scenarios. The average LGD under the EBA stress tests is 3.54% lower than the Feds stress tests and 10.18% lower than our stress tests, both of which are meaningful statistics given the absolute number of liabilities.
The table below is re-produced from our February 2016 webinar but with an additional column of data: LGD estimates under the EBA stress tests.
Worryingly, it is apparent from our analysis that S&P Global Market Intelligence, the Fed and the BoE all apply greater stresses to Euro-Area banks (banks in countries within the Monetary Union) than the EBA.
Can the apparent relative ease of EBA stress tests be justified given the current condition of banks and the uncertain climate they face?
How Secure and Robust Are European Banks?Ultimately, these questions must be answered by those entities which are exposed to the European banking sector and these questions can only be answered by having robust and predictive credit tools in place….Chief Risk Officers beware.
If you would like to hear more on this topic you can watch the webinar replay here. Alternatively, you can request more information on the data and analytical tools used for this analysis here.