The European Banking Agency (EBA) together with the Norwegian bank have started the stress tests to which they will submit European banks from this start of the year until July. In them, the most adverse scenario that has been experienced so far is contemplated, with a cumulative gross domestic product (GDP) of 6% between 2023 and 2025 and which is based on the hypothesis that a “severe” worsening of the geopolitical situation, accompanied by an increase in the prices of raw materials and an increase in covid infections.
As a consequence, inflation would continue to rise with an average of 9.7% this year, above the 9% in 2022, which would remain high in the following two years. In practice, it would be 3 percentage points more inflation this year than in the baseline scenario, which is the one drawn by the European Central Bank (ECB) in its latest December forecasts.
And this would lead to an increase in long-term interest rates of 183 basis points between the end of 2022 and the end of 2025. Only a partial recovery in 2025, which would result in a 6% recession overall in those three years, while the unemployment rate in the euro area would rise to 12%, after registering an increase of 6.1 percentage points.
The stock markets would also be affected, according to EBA calculations, plummeting 55%. At the end of 2025, they would still be 45% lower than in 2021. The real estate sector would also suffer, with prices falling around 21% for homes and 29% for commercial goods. Due to the economic deterioration and the rise in interest rates, the risks of creditor defaults, both individuals and companies for banks, would increase.
In these new tests, the sample of banks used will increase by 40%, since 70 entities will be examined, compared to 50 in 2021, representing 75% of the banking sector in the EU and Norway. Of all of them, 57 belong to countries of the euro zone. In these test banks, they will have to offer, for the first time, their credit exposure to companies with a breakdown by each economic sector that will increase the credibility of the exercise and will serve as a basis for tests to be carried out in the future.
The objective of these tests is to assess the resilience of banks to sudden and severe shocks, to identify areas of uncertainty and to provide supervisory authorities with information on ways to mitigate threats for the future.
