GERMAN banks are facing a “major challenge” due to the COVID-19 pandemic, a recent stress test carried out by the European Central Bank (ECB) has shown.
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The test was intended to provide information on how well European financial institutions are prepared for further troubles brought on by the escalating Covid pandemic. And according to Andreas Dombret, former Bundesbank board member, the test revealed that the situation “is a major challenge, especially for German banks”. Mr Dombert said: “Because of the uncertainty about the further consequences of the Covid pandemic, the banks have already gone into the test with increased risk provisioning, so the starting point of the stress test, namely December 31, 2020, was already in the crisis.”
However, the expert pointed out that it is often forgotten that the tests are based on fictitious scenarios that assume extremely negative economic developments.
He said: “This is deliberately exaggerated and only realistic in the rarest of exceptional cases.
“In addition, the assumptions vary greatly from test to test.”
Mr Dombert continued: “A comparison with the results of previous studies is therefore only possible to a very limited extent, and banks can only be compared with one another to a very limited extent due to their different business models.”
German banks are facing a ‘major challenge’ due to the COVID-19 pandemic. (Image: Getty)
The stress test was carried out by the European Central Bank. (Image: Getty)
Even if the stress test covered more than 70 percent of European bank assets, it would only provide a trend and not a definitive statement about the state of the European banking system.
The test was suspended last year because of the coronavirus pandemic and according to Mr Dombert that should be taken into consideration.
He said: “The scenario envisages a sharp rise in the number of bankruptcies, a collapse in property prices and a sharp drop in foreign demand.
“The test also simulates that short-term rates are higher than long-term rates.
The test was suspended last year because of Covid. (Image: Getty)
“The assumptions therefore have an even more negative effect than in the previous scenarios and are a major challenge, especially for the interest-sensitive banks in the export country Germany.”
The conclusions drawn from the test have been very limited, according to Mr Dombert.
He claimed that the reason for that was because “stress tests are already part of everyday life for supervisors and banks”.
The expert added: “They constantly simulate negative scenarios in order to test the resilience of individual institutions and loan portfolios.
Financial Gazette
