German banks prove resilient in stress tests - with some exceptions

The majority of banks and savings banks in Germany would survive a severe global economic downturn, according to the results of a joint stress test by financial regulator BaFin and the German central bank, the Bundesbank.

Nikolas Speer, BaFin's chief banking supervisor, summarized the findings at a press conference in Frankfurt on Thursday, saying "institutions remain on a sound footing overall."

However, several dozen institutions were unable to meet the capital requirements set by supervisors in the simulated scenario. This was "roughly half" the number from two years ago, when they last ran the stress test.

"We are taking particular note of the institutions that were flagged by the stress test," Speer said. "Should it be necessary, we will take timely supervisory measures."

Since April, BaFin and the Bundesbank have assessed 1,113 small and medium-sized financial institutions, representing almost 90% of Germany’s banks. 

The three-year stress scenario assumed escalating geopolitical tensions, higher trade barriers, supply-chain disruptions and commodity prices, as well as falling global trade, employment and economic output. It also included higher interest rates and sharp declines in stock and bond markets.

In such a scenario, the aggregate common equity tier 1 capital ratio of banks and savings banks would fall by around 3.8 percentage points to 14.6%, the report said. This means that the institutions would have fewer buffers to cushion further setbacks.

Bundesbank executive board member, Michael Theurer, said: "The persistently high level of uncertainty surrounding future geopolitical developments makes the economic outlook more difficult." He urged banks to plan cautiously so they can maintain adequate capital and continue lending during future shocks.

Since the global financial and economic crisis of 2008-2009, supervisors have regularly used stress tests to examine how vulnerable banks would be in a crisis.

The aim is to identify risks on balance sheets and weaknesses in business models as early as possible.