Eurozone banks set for rate SHOCKS after sudden lending freeze tightening, says ECB

Monday, October 9, 2017
By Paul Martin

EUROZONE banks are well prepared for sharp changes in interest rates, the European Central Bank has said after simulating scenarios from sudden monetary tightening to the lending freeze that followed Lehman Brothers’ collapse.
Mon, Oct 9, 2017

The results come as the ECB prepares to start dialling back its monetary stimulus after years of ultra-low interest rates and massive bond purchases, paving the ground for rate hikes further down the line.

The ECB found that higher interest rates would lead to higher net interest income in the next three years for a majority of the 111 banks in the stress test, but also to a lower economic value of their equity.

Results of the test, which started in February, will be incorporated into the ECB’s broader review of banks, which determines how much capital each lender needs to hold.

The ECB said: “While the capital demand for individual banks might be adapted to the identified risks, the overall capital demand will not change as a result of the interest rate sensitivity analysis, all else being equal.”

As part of the test, the ECB modelled six hypothetical interest rate shock scenarios to see how net interest income and the value of the banking book equity would change in each case.

Banks, particularly in richer countries such as Germany, have long complained that the ECB’s ultra-low interest rates have squeezed the margins they make on loans.

The ECB’s supervisory arm, which carried out the exercise, is formally separated from its monetary policy function.

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