Jan 31, 2023
Europe to Take Toughest View Yet in Key Test for Bank Payouts
(Bloomberg) -- European banking regulators will hold their toughest stress test yet to see if the industry has the financial reserves needed to handle a sharp downturn in the economy, with firms that fare badly potentially facing pressure on shareholder payouts.
Covering about three quarters of banking assets in the European Union and Norway, 70 banks will have to calculate how they would fare following a hypothetical worsening of geopolitical developments, higher commodity prices and a resurgence of the pandemic, the European Banking Authority said on Tuesday.
The so-called adverse scenario would see elevated inflation and a global recession as well as increased interest rates. That would lead to a contraction in real economic output of 6% over three years, more severe than in previous tests.
While the broad outlines bear some resemblance to current conditions, the scenario isn’t likely to materialize, according to the EBA. Still, the results in late July may provide a counterpoint to the optimism that bankers have expressed in recent months on their ability to shoulder fallout from Russia’s invasion of Ukraine and reward investors with billions of dollars of share buybacks and dividends.
The test doesn’t have a pass or fail grade, but regulators like the European Central Bank use the results to set banks’ individual capital requirements and to challenge them on their planning for financial reserves, including on shareholder payouts.
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