ECB stress tests on banks amid the coronavirus crisis

A sign of the Eurosystem’s monetary authority is located outside the headquarters of the European Central Bank.

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Banks in the euro area could soon face difficulties if the current crisis deepens and erodes their capital positions, Andrea Enria, chairman of the European Central Bank’s supervisory board, told CNBC in an exclusive interview on Tuesday.

So far, the financial system has weathered the coronavirus-led economic recession, with academics and policy makers arguing that, in contrast to the global financial crisis, lenders are part of the solution to the current shock.

“The banking sector (in the euro area) is in a very strong position to withstand an unprecedented shock,” Enria told Annette Weisbach of CNBC.

However, he warned that if the crisis deteriorates, some banks “would face difficulties in maintaining compliance with the minimum (capital) requirements.”

His comments came shortly after the ECB released an assessment of 86 banks in the euro area, which showed that they can meet the challenges posed by the coronavirus pandemic. However, if the economic crisis persists, the depletion of bank capital could be “material”.

Banks underwent stress tests under two scenarios: one based on the central bank’s benchmark forecast for a 8.7% contraction of gross domestic product in 2020; and a more severe situation, which estimated a fall of 12.6% of GDP in 2020. In the first scenario, the ordinary capital ratio of banks’ level 1, a measure of bank solvency, decreased by 1.9 percentage points . However, in scenario two, the CET1 ratio fell 5.7 percentage points.

“In this scenario, several banks would have to take steps to maintain compliance with their minimum capital requirements, but the overall deficit would remain contained,” the central bank said in a statement.

Eurozone banks are often valued based on their geographical position, and lenders in southern nations are seen as a higher risk than those in less indebted northern economies. However, Enria told CNBC that the tests carried out were not “focused on individual banks or individual countries.”

“The peculiarity of this crisis is that sometimes the concentration of exposure to certain sectors of the economy, for example, is more important than other dimensions,” he said.

ECB extends dividend ban, share buyback

In a separate announcement on Tuesday, the ECB asked European lenders not to pay dividends and not buy back shares until January 2021.

The central bank also called for “extreme restraint” in wages. These steps are intended to allow banks to keep their capital positions somewhat stable.

“It really is not a question of how deep the recession is, the point is how uncertain we are about the capital trajectories of the banks,” said Enria.

To date, the European banking sector has fallen by approximately 33% since the beginning of the year.