Macroprudential Stress Test of the Euro Area Banking System Amid the Coronavirus (COVID-19) Pandemic
64 Pages Posted: 18 May 2022
Date Written: October 1, 2021
The macroprudential stress test for 2021-23 aims to provide insights into the resilience of the European banking sector following the coronavirus (COVID- 19) crisis. The assessment builds on a macro-micro model with individual euro area economies and significant banks, and the two scenarios from the 2021 EU- wise stress test exercise. In the baseline scenario, the system-wide transitional CET1 ratio goes down from 15.5% in 2020 to its pre-pandemic level of 14.4%. In the adverse scenario, the CET1 ratio drops by 5.2 percentage points from 15.5% in 2020 to 10.3% in 2023. Macro-financial amplification in the macroprudential stress test results in higher capital depletion in the adverse scenario compared to the EBA/Single Supervisory Mechanism (SSM) stress test. Bank lending expands in the baseline scenario and shrinks in the adverse scenario. The outstanding COVID-19 mitigation policies have a pronounced positive lending effect, especially in the adverse scenario. The banking sector-real economy feedback loop amplifies the severity of the adverse scenario. The adopted assumption on banks’ intentions to use capital buffers can affect the outcomes of the macroprudential stress test.
Keywords: COVID-19, impact assessment, banking sector, real-financial feedback mechanism
JEL Classification: E37, E58, G21, G28
Suggested Citation: Suggested Citation