Capital shortfalls of European Banks using the CCAR 2016 methodology. This figure shows the ranking of banks with the highest capital shortfall in the EBA 2016 stress test using the losses in the adverse scenario of the EBA stress test and the CCAR 2016 methodology (using CCAR prudential capital ratios). Capital shortfalls are reported in million euros and banks are shown if the capital shortfall is at least two billion euros. Graphic: Steffen, et al., 2016 / ZEW

By Kathrin Jones and Jonathan Gould; Editing by Alexander Smith
9 August 2016

(Reuters) – Deutsche Bank had the highest potential capital shortfall, 19 billion euros ($21 billion), in a study of 51 European banks using U.S. Federal Reserve stress test methods, German economic research institute ZEW said.

"European banks lack sufficient capital to offset the losses expected in the case of another financial crisis," the ZEW said in a statement on Tuesday.

ZEW Finance Professor Sascha Steffen worked with New York University Stern School of Business and the University of Lausanne researchers to run stress tests used by the Fed in 2016 and the European Banking Authority (EBA) in 2014 to compare capital needs and leverage.

Using the Fed's approach, the 51 European banks showed a total capital shortfall of 123 billion euros, with the largest gaps at Deutsche Bank, Societe Generale (13 billion euros) and BNP Paribas (10 billion euros).

Societe Generale and BNP have market capitalisations of 26 billion euros and 55 billion euros, respectively, well above the study's theoretical capital gap. […]

"The USA have drawn their own conclusions and implemented comprehensive measures for the recapitalisation of the American banking sector as early as in 2008," Steffen said.

"A lack of political will means that this has still not happened in Europe," he added. [more]

Deutsche Bank had biggest potential capital gap in ZEW study


9 August 2016 (ZEW) – European banks lack sufficient capital to offset the losses expected in the case of another financial crisis. Quite how big losses are depends, however, on the stress level to which banks are subject. A recent study carried out by Sascha Steffen (Centre for European Economic Research (ZEW) and University of Mannheim) together with Viral Acharya (New York University Stern School of Business) and Diane Pierret (University of Lausanne) has considered results from the latest round of stress tests carried out for European banks. The study shows that the measured capital shortfalls differ to the extent of billions according to the stress scenario and the stress test methodology used. In particular, substantial differences are seen for banks in France, the United Kingdom, in Germany, Spain, and Italy.

The researchers based their comparison on two benchmark methodologies; the approach taken by the European Banking Authority (EBA) in stress tests conducted in 2014, and the approach used by the US Federal Reserve (Fed) in the stress test conducted in the US banking sector in 2016 (CCAR 2016). Building on assumptions made in the EBA and Fed stress tests, researchers used a third, market-based approach, which assumed a global stock market decline of 40 per cent over six months. As in the EBA stress test conducted in 2016, the study considered 51 European banks, 34 of which are publicly listed.

German and French banks have the largest capital shortfalls

Under the EBA methodology, the capital shortfalls of all 51 banks totalled 5.6 billion euros. The CCAR 2016 approach resulted in total capital shortfalls of 123 billion euros for all 51 banks. The banks with the largest capital shortfalls are the Deutsche Bank (19 billion euros), and the French banks, Société Générale (13 billion euros) and BNP Paribas (10 billion euros).

If the 34 publicly listed banks are considered, the differences between measured capital shortfalls are even more stark. Capital shortfalls of the publicly listed banks in the market-based approach totalled 675 billion euros, whilst the Fed stress test revealed shortfalls of 92 billion euros. The banks with the largest capital shortfalls were the French banks, Crédit Agricole (79 billion euros) and BNP Paribas (75 billion euros), and the Deutsche Bank (60 billion euros).

The loss potential depends on the stress level to which banks are subject

"The main objective of the recent EBA stress test was to achieve transparency in regard to bank capital adequacy in stress scenarios, not to reveal capital shortfalls that need to be taken care of immediately," explains Professor Sascha Steffen, head of the ZEW Research Department "International Finance and Financial Management" and co-author of the study. "Our comparison also explains the differences between the market-based approach and CCAR 2016: the prudential capital ratio used as a threshold, the severity of the stress scenario and differences in market-to-book ratios across banks."

According to Sascha Steffen, the deficiencies revealed by the combined stress scenarios could be overcome. "The USA have drawn their own conclusions and implemented comprehensive measures for the recapitalisation of the American banking sector as early as in 2008. A lack of political will means that this has still not happened in Europe."

Download the study at: www.sascha-steffen.de

Contact

Professor Sascha Steffen, Phone +49(0)621/1235-140, E-mail steffen@zew.de


ABSTRACT: The European Banking Authority (EBA) disclosed the effect of losses in a stress test on bank capital ratios on 29 July 2016. We assess the capital adequacy of these banks based on these disclosures and using two supervisory approaches (the approach used by the EBA in the Asset Quality Review in 2014 and the methodology used by U.S. supervisors in the Comprehensive Capital  Analysis  and  Review  (CCAR)  in  2016)  and a market -based  approach. The  two supervisory  approaches  yield  an  ordering  of banks with respect to their capital shortfall (or surplus) that is negatively correlated. The CCAR 2016 approach, however, ranks banks similarly as the market based approach. The capital shortfall differences between the approaches can be attributed to (i) different prudential thresholds applied to capital ratios, (ii) different loss projections under the stress scenario, and (iii) the difference between market and book  values  of  bank  equity. The  differences  are  particularly  large  for  banks  in  France, Germany, Italy, Spain, and the United Kingdom.

Introducing the “Leverage Ratio” in Assessing the Capital Adequacy of European Banks

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