European Bank Stress Tests Show Capital Depletion

Alvarez & Marsal has analyzed the 2023 European Banking Authority (EBA) stress test results, which indicate the second-highest capital depletion on record, with an average decline of 459 basis points (bps). This figure is slightly lower than the 485 bps recorded in the 2021 tests.

The higher capital depletion was attributed to a more severe scenario and quality assurance impacts from the European Central Bank (ECB), accounting for roughly one-third of the total depletion. The results showed a greater capital impact compared to recent stress tests in the US and UK. Despite the depletion, the tests did not yield major surprises and demonstrated the banking sector's overall resilience.

Most banks remain in solid financial health, with only one institution falling below the minimum threshold. Improved net interest income and low non-performing loan levels contribute to their ability to weather these simulated stresses. A divergence exists between banks and regulators regarding capital distribution; while regulators express caution due to economic uncertainties, banks aim to increase dividends and share buybacks driven by favorable interest rates and rising profitability.

Geographically, Germany, France, and Denmark experienced the most significant capital depletion, while Hungary, Poland, and Norway were least affected. Looking ahead, the ECB is preparing for a cyber resilience stress test in 2024, and the EBA will conduct a climate stress test. Analysts suggest improvements are needed in the current stress testing process, particularly in quality assurance, which they deem inefficient. Increased regulatory focus on liquidity risk is also anticipated.