Association of German Banks on the results of the stress test

15 July 2011 – The European Banking Authority (EBA) today published in London the results of the EU-wide stress test, in which 13 banks from Germany participated – for 12 of these, results are available. Michael Kemmer, General Manager of the Association of German Banks, comments in this connection as follows:

“Regulatory stress tests such as the current EBA test can deliver valuable insight at overall market level. The results published today allow, in particular, an assessment of the resilience of the European banking system as a whole. In this respect, they provide important information, create transparency and thus help to build confidence. We therefore appreciate the work performed by the EBA in conducting this year’s stress test.

At the same time, it is highly regrettable that the EBA has not taken up our criticism of the present form of publication of the stress test results and unfortunately discloses wide-ranging details of individual banks’ business strategy. In the current uneasy situation on the financial markets, it cannot be ruled out that this detailed information may seriously exacerbate market volatility or could even be used for speculation against some banks.

This stress test is based on a hypothetical adverse scenario that is applied uniformly to all banks without making allowance for different portfolios. Hence, it cannot automatically be concluded from the results now available that individual banks need recapitalising. The present stress test is also not about assessing banks’ current capital levels. It is instead about ascertaining how resilient banks are in an extreme scenario which is unlikely to ever occur in this form.

The individual results should therefore not be overrated and now need to be analysed thoroughly. It should also be examined in every single case whether and, if so, which follow-up actions make sense. On the one hand, the limited insight obtained under the standardised scenario methodology means that a bank which passes the test may subsequently still get into trouble. On the other hand, a bank which fails the test may nevertheless have a sustainable business model.

Overall, the EBA has toughened the stress test significantly compared with last year: the scenarios it assumes are generally appropriate and much more severe than in 2010. Furthermore, anticipating the Basel III capital rules, the EBA applies a new, narrower definition of capital – one which is not yet legally valid, however.”