The Committee of European Banking Supervisors (CEBS) was mandated by the Economic and Financial Affairs Council (Ecofin Council) to conduct a stress testing exercise for the EU banking sector in cooperation with the European Central Bank (ECB), the European Commission, national supervisory authorities and national central banks.The objective of the exercise was to assess the resilience of the participating 91 EU banks to severe but plausible negative economic developments.This also includes an assessment of the banks’ ability to absorb potential shocks on credit and market risks, including sovereign risks.
The stress scenario was based on the following key assumptions:In 2010 and 2011, aggregate economic growth is 3 percentage points lower in the EU and 4 percentage points lower in Austria than the European Commission’s forecast.The yield curve shifts upwards and flattens out.Risk premia in European government bond markets widen – on a country-by-country basis – relative to their levels at the beginning of May 2010.To take account of the specific risk profile of Austrian banks given their substantial exposures in Central, Eastern and Southeastern Europe (CESEE), stricter assumptions were applied for this region in accordance with CEBS and in line with the most recent OeNB stress tests.
The three largest Austrian banks participated in the 2010 stress testing exercise of CEBS.The OeNB was responsible for conducting the stress test of Erste Group Bank and Raiffeisen Zentralbank.UniCredit Bank Austria was indirectly covered through its parent bank in Italy, UniCredit Group. The three banks account for half of Austria’s banking sector, which is in accordance with CEBS requirements.
The results of the stress test exercise were satisfactory for the participating Austrian banks.Under the assumed scenario, the Tier 1 ratio of Erste Group Bank would decline from an initial 9.2% at end-2009 to 8.0% at end-2011, that of Raiffeisen Zentralbank from 9.3% to 7.8%.Hence, even in the case of the assumed shock, the Tier 1 ratios of both large banks would be (nearly) twice as high as the minimum regulatory capital requirements.In fact, the two banks’ Tier 1 ratios would remain considerably above the threshold of 6%, which was established for this stress test as the level at which a bank is considered to have passed the test.Notwithstanding this result, considering the ongoing regulatory initiatives (Basel III), there is a medium-term need for the European banking landscape as a whole – as well as for the Austrian banking sector – to strengthen its capital position further, with at least some of the required funds coming from retained profits.