You are here

New stress parameters for banks

26/02/2016 14:10
The adverse scenario for Cypriot banks includes significant property price reduction and economic recession, according to data published yesterday by the European Bank Authority.

The European Banking Authority announced basic parameters of the baseline and adverse scenarios that will be used for each country, as part of the methodology for European stress tests.

Cypriot banks do not participate in the EU-wide 2016 stress tests due to their size (below €30 bn.) but will participate in the annual supervisory review.

EBA notes that, for those significant institutions not covered by the EBA stress test, the ECB will conduct in parallel its own stress test which, will give due consideration to the lower size and complexity of these institutions.

«Smaller banks not included in the 2016 EU-wide stress test will be tested by their relevant competent authorities as part of the Supervisory Review and Evaluation Process», according to EBA documents.

Based on this procedure, Cypriot banks were forced to make additional provisions over €1 bn, for problem loans. As the Bank of Cyprus announced yesterday, its provisions for the fourth quarter of 2015, reached €630 mn. The Hellenic Bank had to make addition €71 mn. in provisions according to its annual results report, published today.

The baseline and adverse scenario of 2016 is based on assumptions for the future development of a combination of financial indicators until 2018.

The GDP based on the baseline scenario, will grow by 1.5% in 2016, 2% in 2017 and 2,2% in 2018, while the adverse scenario refers to a recession of 1.7% in 2016 and 1.3% in 2017 and to growth of 1.9% in 2018.

The EBA’s baseline scenario assumes an increase in housing property prices by 3.4% in 2016, 5% in 2017 and 4.5% in 2018. The adverse scenario estimates that prices will fall by 6.4% in 2016, by 0.7% in 2017 and increase by 0.7% in 2018.

According to the baseline scenario, commercial real estate prices will fall by 0.7% in 2016 and record an increase of 5.9% in 2017 and 2.8% in 2018. The adverse scenario provides for a reduction of 9.1% in 2016, 4% in 2017 and 5,5% in 2018.

Unemployment will drop to 14.5% in 2016, 13.2% in 2017 and 11.9% in 2018 based on the baseline scenario while in the adverse scenario unemployment is expected to remain at 15.3% this year and the next and fall to 14.5% in 2018.

Inflation, according to the baseline scenario is expected to increase by 0.6% this year, by 1.3% in 2017 and by 1.5% in 2018 while according to the adverse scenario a drop of 2.5% is expected for 2016, 0.2% in 2017 and 0.1% in 2018.

EBA methodology

The EU-wide stress test will be conducted on a sample of 51 EU banks covering 70% of the banking sector in the EU and will be run at the highest level of consolidation. The process for running the exercise will involve close cooperation between the EBA and the CAs (including the Single Supervisory Mechanism – SSM), the European Central Bank (ECB), the European Systemic Risk Board (ESRB) and the European Commission (EC).

As a combined result of the foreign demand shocks, financial shocks and domestic demand shocks in the EU, the scenario implies a deviation of EU GDP from its baseline level by 3.1% in 2016, 6.3% in 2017 and 7.1% in 2018.

The adverse scenario also includes a shock in the residential and commercial real estate prices, as well to foreign exchange rates in Central and Eastern Europe.