Only three banks examined by the Banking Authority would not meet the minimum capital requirements in an adverse scenario

The European Banking Authority (EBA) has indicated that only three entities, none Spanish, among the 70 European banks that it has examined, would fail to meet the minimum solvency requirements under the adverse scenario proposed in the tests and would be forced to raise capital.

“Under the adverse scenario, all banks except three meet the TSCR (total PRES capital requirement),” the authority says, without identifying these three entities.

However, the EBA points out that, of the three banks, two have a lower TSCR deficit, while the entity with a higher deficit complies with the TSCR under the adverse scenario when IFRS 17 is applied, that is, the accounting standard for insurance activities that entered into force on January 1, 2023.

Likewise, the EBA points out that, in terms of the leverage ratio requirements, four banks do not comply with the TSLRR (the total leverage ratio of the PRES) in the adverse scenario”, although it points out that for three of them the difference is small. , while meeting the risk-based TSCR.

On the other hand, the EBA analysis warns that a total of 37 banks examined would run the risk of seeing dividend distributions limited by failing to meet the MDA (maximum distributable amount) requirement in 2025.

This means that when the transitory CET1 ratio falls below the OCR requirement, it would be in breach of the MDA and may lead to asking banks to reduce their distributions.

What does the ECB conclude?

Regarding the examination to which the European Central Bank (ECB) has submitted 98 entities, including 57 examined by the EBA and 41 smaller ones, all banks retain enough capital under the base scenario to cover their capital requirements, while , under the adverse scenario, 53 banks would be subject to restrictions on the payment of dividends in at least one year of the projection horizon (51 banks in the last year), since they would breach the risk-based MDA (maximum distributable amount) threshold.

In this sense, the central bank points out that this has a positive effect on the capital ratios of the entities, since the reduced distributions boost the available capital base, which leads to less depletion during the stress test horizon. in general.

Other than that, only nine banks, none of them Spanish, would have difficulty meeting their total SREP capital requirements and/or leverage ratio requirements in the adverse scenario, including the three entities noted in the test led by the EBA.

“An additional 8.1 billion euros would be needed, together for the affected banks, to restore capital levels in line with the respective capital requirements in the specific scenario considered,” the ECB explains.

However, the institution underlines that, given the nature of the stress test, which is not a “pass or fail” exercise, the identified capital shortfalls will not, however, lead to immediate recapitalization actions and instead , the results at the bank level will inform the supervisory evaluation and review process (SREP) for each institution.