By Huw Jones
LONDON, Jan 31 (Reuters) - European Union banking
regulators on Tuesday launched a stress test to check how banks
could cope with a long period of high inflation and interest
rates just as the European Central Bank is expected to raise
borrowing costs further.
The latest bi-annual stress test reflects the change in the
macroeconomic environment, as Russia's invasion of Ukraine has
helped to push inflation in Europe to decades-highs and interest
rates have risen rapidly to tackle it.
The previous stress test in 2021 was set against a "low for
long" interest rate backdrop.
The broadest and toughest test to date, it assumes that
Russia will cut off its remaining gas supplies to the EU,
sending energy prices surging, and EU inflation to 9.7%,
compared with the euro zone peak of 10.6% last October.
Stress tests have become a regular feature for banks,
initially to recapitalise them after being bailed out by
taxpayers in the global financial crisis more than a decade ago,
and more recently to check on-going resilience.
The European Banking Authority (EBA) said the latest test of
theoretical shocks, designed in conjunction with the ECB, covers
70 EU banks, 20 more than in 2021, representing 75% of the
bloc's total banking assets.
"The narrative depicts an adverse scenario related to a
hypothetical severe worsening of geopolitical developments,
accompanied by an increase in commodity prices and resurgence of
COVID-19 contagion," EBA said in a statement.
This leads to a 6% drop in GDP, a surge in unemployment,
falling property prices, cuts in gas supplies, and persistent
high inflation and high interest rates over a three year period
to 2025.
Bank-by-bank results, with no pass or fail mark, will be
published at the end of July, to inform annual regulatory
assessments of capital buffers.
A bigger sample of banks makes it possible to introduce a
more simplified approach to assessing risks, EBA said.
There is also new, more detailed approach to how the shocks
feed through into sectors banks are exposed to, though links to
non-banks, such as investment funds, now a regulatory focus, or
climate change are not explicitly included.
EU regulators want more scrutiny of fallout on the banking
sector after the supply chain disruptions following the
pandemic, and the higher vulnerability of energy-intensive
sectors following the Ukraine war.
The test contrasts with the ECB's actual outlook of
inflation falling to 6.3% this year and 3.4% next year. The ECB
also sees economic growth accelerating from this year's 0.5% to
1.9% next year.
(Additional reporting by Balazs Koranyi in Frankfurt, editing
by Jane Merriman)
Messaging: huw.jones.thomsonreuters.com@reuters.net))
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