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.”
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.
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“A lot of information is therefore already available. The difference is that these investigations are not made public.”
Mr Dombert added that while the tests are extremely time consuming for everyone involved, they are worth the effort.
He said: “Transparency and a positive result strengthen confidence in the stability of the system.
“Since the banks have to supply and compile all the data themselves, the process ties up enormous resources.”
He added: “The same applies to the evaluation of the information by the supervisory authorities.
“In the coming year, the effort will increase again when the ECB will then focus on climate risks in a stress test.
“In any case, it would make sense if the banks could store the data in the cloud in the future and the supervisors could then work with it.”
He continued: “Although this is a long way off, it would significantly reduce the workload of the banks.
“At least until then, the critical question about the relationship between expense and income is, in my opinion, entirely justified.”
Additional reporting by Monika Pallenberg