EU Wide Stress Tests - Results for Greece
23/07/2010 - Press Releases
The Bank of Greece welcomes the publication of the results of the EU-wide stress-testing exercise, which was conducted by the Committee of European Banking Supervisors (CEBS) and national supervisory authorities, in close cooperation with the European Central Bank. The aim of the test was to assess the overall resilience of the EU’s banking sector to major economic and financial shocks. The exercise represents an important step forward in supporting the stability of the EU and euro area banking sectors.
The exercise used a sample of 91 EU banks from 20 member-states, covering at least 50 percent of each country’s banking sector on a consolidated basis. Two scenarios were used for the conduct of the exercise for both 2010 and 2011: (1) a baseline scenario, which closely follows the consensus of macroeconomic projections for 2010 and 2011, and, (2) an adverse scenario, which incorporates tail risks, especially related to sovereign debt and a significant deterioration in macroeconomic conditions. The adverse scenarios used are designed as “what-if” scenarios reflecting severe assumptions, which are very unlikely to materialize.
In the case of Greece, the adverse scenario includes a much sharper economic downturn in 2010 and 2011 than currently envisaged by international institutions, and interest-rates much higher than present ones (see www.c-ebs.org).
The six largest Greek banking groups participated in the stress tests - - namely, NBG, EFG Eurobank, Alpha Bank, Piraeus Bank, ATEBank and Postbank. These banks account for more than 90 percent of the Greek banking sector’s assets (excluding foreign banks’ subsidiaries).
For the six banks as a whole, the results indicate a net surplus of Tier 1 capital of the order of € 3.3 billion above the 6 percent ratio of Tier 1 capital that was agreed as a benchmark solely for the purpose of the stress test. This benchmark, however, should not be construed as a supervisory minimum; the supervisory minimum for Tier 1 capital is set at 4 percent. It should also not be construed as a target level that reflects each institution’s risk profile as set in the context of supervisory function in the application of Pillar 2 methodology, defined by the EU Directive (ΕC/2006/48).
The individual results for the six banks’ are available on their websites. The results show that under the adverse scenario including sovereign shock five of the six banks pass the test. Four of these banks (Postbank, Alpha Bank, EFG Eurobank, NBG) come in above the benchmark , while one (Piraeus) comes in at the benchmark of 6%. For ATEbank, the Tier 1 ratio falls to 4.4 percent at the end of 2011, indicating a shortfall of € 242 million.
It is important to emphasize that, under the baseline scenario, all six Greek banks exceed the 6% benchmark.
Comments on the results
In order to properly interpret the results, it is crucial to recognise the exact significance both of the indices used and the monetary amounts resulting from the application of the various individual scenarios that were constructed for the purposes of the EU-wide exercise. The results under the adverse scenario reflect neither the present situation nor the possible immediate capital needs. By construction, a stress test does not aim to predict expected outcomes, as the various scenarios are intentionally constructed as “what if” scenarios.
At the end of 2009, the six participating banks had Tier 1 ratios between 8.4 percent and 17.1 percent. Although the application of extremely adverse assumptions would lead to a decline of the Tier 1 ratio ranging from 3 to 7 percentage points, the high starting point allowed four of the six Greek banks to remain above the 6 percent benchmark, and one bank to be at the 6 percent benchmark.
The significant capital increases that took place in 2009 underlie the Greek banks’ performance. This enhancement was mainly the result of the increase in supervisory own funds. The main factors that contributed to the increase in supervisory own capital were: the capital raised by several banks from the market, internal financing through retained earnings as no dividends were distributed in 2009, as well as the issuance of preference shares.
The Bank of Greece will closely monitor the developments and will ensure that necessary steps are taken to increase capital adequacy of banks where needed. In any case, the establishment of a € 10 billion Financial Stability Fund, in the context of the Greek economy’s support program, provides a safety net for banks’ capital adequacy. In addition, € 1.2 billion is available through the issuance of preference shares (Law 3723/2008).
More details are available on the websites of CEBS (http://stress-test.c-ebs.org/results.htm), the Bank of Greece’s (http://www.bankofgreece.gr/Pages/en/Supervision/stresstest.aspx) and the six banks.