PARIS: European banks can weather a severe economic crisis with a sharp drop in their financial reserves, according to results from an extensive stress test published on Friday.
In the worst-case scenario, described as “very severe” and covering a period of three years, the European banking sector would suffer a capital loss of 265 billion euros ($314 billion) by 2023, the European Banking Authority said in a statement, reports AFP.
“The assumptions made were unbelievably harsh,” grumbled one bank boss, who declined to be identified.
“This test has a somewhat artificial side, where we pretend, for example, that in a 100-year crisis we would continue to extend credit as if nothing had happened.”
The worst-case scenario imagines starting from an already weak economic environment in 2020 and is based on an extended pandemic, a strong drop in confidence and prolonged low-interest rate environment.
The modelling predicts a fall in the European Union’s gross domestic product of more than 3 percent over three years, with the economy shrinking in all countries.
Following such a shock, the average “tier one” capital ratio, a key indicator of financial soundness, would fall from about 15 percent to around 10 percent, a level generally considered acceptable by supervisors after three years of stress.
Twenty of the 50 banks would have seen core capital fall below 10 percent at the end of the three years, according to the test.