Stress test 2016
Objective of the Stress testing exercise 2016
- The EBA published today the detailed results of the EBA stress test exercise conducted for 51 EU large banks, of which 37 institutions for SSM countries directly supervised by the ECB. The EU- wide stress test exercise for the group of the largest EU banks includes Belfius and KBC Bank. ING Belgium and BNP Paribas Fortis, which are subsidiaries of foreign banking groups, are included in the stress test through their parent institutions.
- The objective of the EU‐wide stress test is to provide supervisors, banks and market participants with a common analytical framework to compare and assess the resilience of large EU banks and the EU banking system to adverse economic shocks. The stress test contains a baseline scenario and an adverse scenario, both of which have three-year horizons. The assumptions regarding the macroeconomic variables in the baseline scenario correspond to the European Commission’s Autumn 2015 forecast. The adverse scenario, designed by the European Systemic Risk Board, is a hypothetical one reflecting the systemic risks that are assessed as representing the most material threats to the stability of the EU banking sector.
- As the adverse scenario of the stress test is hypothetical, the estimated impacts of this scenario should not be considered as forecasts of banks’ profitability. In addition, the results do not take account of possible reactions of banks to shocks, as the stress test is based on an assumption of a constant balance sheet. The stress test results can nevertheless serve as a valuable analytical tool for assessing the potential resilience of bank balance sheets in response to the specific shocks considered.
- Unlike in the 2014 EU-wide stress test, the 2016 EU‐wide stress test has no pass/fail threshold for the projected common equity tier-1 (CET1) ratio in the adverse scenario. Rather, the 2016 stress test, which has been conducted centrally by the ECB for the 37 euro area banks, has been designed to be used as a crucial input into the Supervisory Review and Evaluation Process (SREP), with the primary aim of setting Pillar 2 capital guidance. The stress test will thus be used as a supervisory tool, with the results being discussed with individual banks in the SREP, where mitigating management actions and potential dynamics of balance sheets may also be considered.
 For more detail see https://www.eba.europa.eu/-/eba-launches-2016-eu-wide-stress-test-exercise.
 For more detail on the concept of Pillar 2 guidance and the role of the stress test, see https://www.bankingsupervision.europa.eu/about/ssmexplained/html/stress_test_FAQ.en.html
Results of Belgian banks
- KBC and Belfius each had a good starting position relative to the sample of large euro area banks included in the stress test exercise. At the starting point for the exercise (end 2015), the CET1 ratios stood at 15.2% for KBC and 15.9% for Belfius. These values compared favourably with the average CET1 starting position for the sample of euro area banks of 13.0%. Each of the two Belgian banks also started from a better solvency position than it had in the 2014 stress test, for which the starting CET1 ratios were 12.7% and 13.5%, respectively.
- The performance of KBC and Belfius in the 2016 stress test is also strong in comparison with other euro area banks. With respect to the baseline scenario, KBC and Belfius, along with other euro area banks, report an increase in the CET1 ratio, meaning that the projected CET1 ratios at the end of the stress test horizon (i.e., end 2018) in the baseline scenario are actually higher than the CET1 ratios at the starting point. Whereas the euro area banks report an average increase of the CET1 ratio of 0.6 percentage points in the baseline scenario, Belfius reports an increase in the CET1 ratio of 1.7 percentage points, and KBC reports an increase of 1.0 percentage points.
- The impacts of the adverse scenario for KBC and Belfius are broadly similar to those of the euro area banks, whose average depletion of CET1 ratios in the adverse scenario amounts to 3.9 percentage points. KBC reports a depletion of CET1 ratio in the adverse scenario of 3.9 percentage points, whereas Belfius reports a CET1 depletion of 4.5 percentage points.
- Given their starting CET1 ratios and the estimated depletion in the adverse scenario, the projected final CET1 ratios for the two banks in the adverse scenario thus stand at 11.3% for KBC and at 11.4% for Belfius, well above the euro area average projected final CET1 ratio of 9.1%. The projected CET1 ratios for KBC and Belfius are also higher than their projected CET1 ratios in the 2014 stress test adverse scenario, and they are considerably above the benchmark of 5.5% CET1 used for the 2014 stress test adverse scenario.
- The better starting positions of the two Belgian banks and their performance in this year’s stress test exercise reflect at least in part the adjustments that these banks have made since 2014, including strengthening of their capital position, de-leveraging, reducing the risk associated with their core business lines, and decreasing legacy assets inherited from the crisis. The latter weighed heavily in these banks’ results in the 2014 stress test.
- The stress test results for KBC and Belfius demonstrate improvement in their resilience since 2014. This is a welcome development in an environment going forward that nevertheless remains challenging for the profitability of European banks.