Jacob Gyntelberg's interview with Handelsblatt on the results of the EU-wide Stress Test

  • Interview
  • 28 JULY 2023

German banks perform rather poorly in a stress test


Several German institutions are among the worst performers in a pan-European stress test. On the other hand, the European subsidiaries of two large US institutions are among the winners.

Several large German banks performed comparatively poorly in a pan-European stress test: DZ Bank and the regional banks Helaba and NordLB were among the five worst-performing institutions. Deutsche Bank was only slightly ahead as the eighth worst-performing institution. This can be seen from the figures presented by the European Banking Authority (EBA) and the European Central Bank (ECB) on Friday evening. The banks’ capital ratios were between 7 % and 8 % in the toughest stress scenario.

Nevertheless, the financial supervisory authority believes that the results show that most major European banks are prepared for a harsh economic downturn. ‘

We are generally satisfied with the results of the stress test,’ EBA Director Jacob Gyntelberg told the Handelsblatt. He said that the European banks had started in the stress test with a higher capital ratio, higher-quality loan books and a better performance. ‘This has paid off.’

According to Jacob Gyntelberg, however, there were also a handful of banks whose results were not satisfactory.

‘Common Equity Tier 1 capital ratios of 6 % to 8 % are critical for banks.’

The result of the stress test could not only have regulatory consequences for these institutions but also trigger negative market reactions.

In the stress test, the banks had to simulate the consequences they would suffer if the economy were to collapse, real estate and share prices were to fall and interest rates and inflation were to rise. By the end of 2023, this would result in losses of EUR 496 billion for the financial institutions.

In the 70 institutions examined by the EBA, the CET1 capital ratio fell by an average of 4.59 percentage points to 10.4 % in the crisis scenario. Therefore, the banks performed slightly better than in the last stress test in 2021, even though the test was tougher this time.

How did Deutsche Bank and Commerzbank perform?


Deutsche Bank suffered significant losses in the stress test: its CET1 capital ratio shrank by 5.3 percentage points to 8.1 %. However, this was an improvement compared to the previous stress test: two years ago, its capital ratio shrank by 6.1 percentage points to 7.6 %. The institution attributes this to its improved profitability and its increased equity capital. According to CFO James von Moltke, the stress test demonstrated the institution’s ‘improved resilience’.

At Commerzbank, the CET1 capital ratio fell by 460 basis points to 9.5 % in the stress scenario. In the last stress test in 2021, the ratio fell somewhat more sharply, from 13.2 % to 8.2 %.

Chief risk officer Marcus Chromik claimed that the main reason for Commerzbank’s better performance this year was the higher profits. ‘With our “Strategy 2024”, we have sustainably increased the bank’s profitability and made it even more resilient.’ Commerzbank started the current stress test with a profit of EUR 1.4 billion from 2022. Three years ago, it was only EUR 644 million.

How did the other German institutions perform?


The worst-performing German bank was DZ Bank. Its capital ratio fell by 652 basis points to 7.0 % in the stress scenario. According to the cooperative central institution, this is largely due to an accounting effect that hits the bank particularly hard because of its insurance subsidiary R+V. Overall, DZ Bank proved to be ‘robustly capitalised in the stress test’.

Helaba and NordLB, each with a capital ratio of 7.6 % in the stress scenario, share the second-last place in Germany. At the largest regional bank, LBBW, the ratio was 8.8 %, whereas at BayernLB it stood at 9.5 %.

The European subsidiary of JP Morgan, which became the fifth largest bank in Germany last year, achieved a comparatively comfortable 13.9 %. The front runner in Germany is the European subsidiary of Goldman Sachs at 24.5 %. Volkswagen Bank came in second at 14.7 %.

Why did the German banks perform comparatively poorly?


‘Geographically, we see differences between countries where fixed interest rates are common, such as Germany and France, and countries where loans predominantly have variable interest rates’

says EBA expert Jacob Gyntelberg. Banks in countries with variable interest rates benefit more quickly from interest rate increases because credit conditions adjust automatically. In Germany, however, fixed-interest loans are common. ‘When interest rates are rising, this slows down income,’ emphasises Jacob Gyntelberg.

On the other hand, the German banks also have lower risk costs. ‘Variable interest rates can lead to higher numbers of loan defaults if customers can no longer afford the rising interest burden.’

On balance, these advantages did not pay off for the banks. Spanish institutions, which grant a lot of loans with variable interest rates, performed better in the stress test on average. However, there were also banks in other countries that came under considerable pressure as a result of the scenarios. At the French Banque Postale, the stress test wiped out the entire equity capital. And the European subsidiary of the British Barclays Bank performed even more poorly than DZ Bank with a capital ratio of 6.8 %.

What are the consequences of a poor stress test result?


The financial supervisory authority wants to use the stress test to check how well financial institutions are prepared for economic shocks. It is true that the banks cannot fail. However, the Board of Supervisors includes the results in the annual assessment of the banks. In addition to the statutory minimum requirement, the banking supervisory authority specifies both a mandatory capital buffer and an individual recommendation for each individual bank. The outcome of the stress test affects the level of this individual capital recommendation. While the recommendation is not a hard obligation, the supervisory authority is urging banks to comply with this desired capital ratio as well.

The capital requirements for banks are divided into two levels: there is a vital lower limit consisting of the mandatory minimum requirement and the individual mandatory capital surcharge. If a bank falls below this threshold, the supervisory authority intervenes and issues contingency plans. In addition, there is a softer requirement, which no longer allows a bank to pay dividends and bonuses without restrictions, but does not yet involve strict supervisory measures.

Of the 98 banks reviewed by the ECB, 53 institutions would have lost so much capital that the ECB would no longer have allowed them to pay dividends or bonuses without restrictions. A further nine institutions would even fail to meet their legal requirements.

How did the stress test go?


When the ECB and the EBA conducted their first stress test in 2014, there was great excitement in the financial sector. For months, there were heated discussions about the procedure and the results. Since then, stress tests have been conducted regularly – and the financial supervisory authority and the banks have become more professional and proficient.

Most investors are now also taking a relatively relaxed view of the results, especially as there have been no major surprises in this regard in the past few years. ‘The stress test is becoming more and more of a non-event – for us as well as for the market,’ says a senior banker. Nevertheless, the exercise was good because it made all of the stakeholders more aware of the risks the banks could face.

What does the financial supervisory authority think of the results achieved by the German banks?

The German financial supervisory authority expressed its satisfaction with the performance of the German financial institutions. ‘The results of the stress test show that German banks would be stable even in a very severe economic downturn,’ said Raimund Röseler, chief banking supervisor at BaFin, the financial supervisory authority.

Because of the great macroeconomic uncertainties, Bundesbank Vice President Claudia Buch also views the results as a ‘positive message’. Due to their good capitalisation, the German institutions would also be able to absorb the losses in a negative scenario. ‘But the supervisory authority must continue to be very vigilant,’ warned Claudia Buch.

Who and what was tested during the stress test?


The stress scenario examined the consequences of geopolitical conflicts intensifying and the coronavirus pandemic flaring up again. It was assumed that the gross domestic product in the EU would fall by 6 % from 2023 to the end of 2025. The assumptions were therefore tougher than ever before in a stress test.

This year, 70 institutions took part in the exercise. These included banks from 15 EU countries as well as the largest Norwegian financial institution, DNB. According to the EBA, these banks represent 75 % of the banking market in the EU and Norway. In addition, 57 of the 70 institutions included in the EBA stress test are euro-area banks supervised by the ECB. At the same time, the ECB subjected 41 further banks to a stress test.


The interview was conducted by Yasmin Osman and Andreas Kroener

Handelsblatt (Germany)