Jacob Gyntelberg interview with Børsen: Banks in Europe are resilient

Even in a situation where Europe is hit by a significant economic crisis with soaring unemployment, plummeting house and property prices, and sharply rising interest rates and inflation, European banks should not be overwhelmed.

‘Our stress test here in 2023 clearly shows that banks in Europe are resilient even in the event of a significant recession in Europe and globally’ Jacob Gyntelberg, Director, EBA

This is the conclusion of a new stress test in which 70 of the largest banks in Europe, including Danske Bank, Nordea, Nykredit, Jyske Bank and Sydbank, were asked to estimate the consequences of a significant economic crisis.

Resilient banks

‘Our stress test here in 2023 clearly shows that banks in Europe are resilient even in the event of a significant recession in Europe and globally and even if interest rates rise even further, at the same time as credit spreads widen, unemployment rises, and prices of residential and commercial property and shares fall substantially,’ said Danish economist Jacob Gyntelberg.

He is the director responsible for economic and risk analysis at the Paris-based European Banking Authority (EBA). It is the EBA that coordinates the stress test every other year together with other EU authorities and national banking supervisors.

The stress test found that the 70 banks, which account for approximately 75 % of all banking activity in the EU and 90 % of the Danish banking and mortgage credit sector, will suffer a combined loss of EUR 496 billion, or around DKK 3 700 billion, over three years in the stress scenario.

Credit losses drag down results

The losses will be concentrated in the first year of the stress scenario, but will also be noticeable in the following two years. And, as an economic crisis hits businesses, the self-employed and employees alike, it is largely credit losses that cause the pain.

EUR 346 billion is the amount Europe’s banks will suffer in credit losses over three years in the stress scenario in a new test

EUR 346 billion of the total losses comes from loan write-downs. A further amount of just under EUR 100 billion comes from losses in the banks’ trading departments, with the rest being so-called operational losses.

The good news, however, is that the combination of the banks’ high earnings and the strong capital buffers they have been forced to build up in the wake of the financial crisis means that they can handle the losses, although it will shave around a third off their overall capital in the stress test.

‘The figures from the stress test reflect the significant increase in the banks’ capital buffers since the 2008 and 2009 crisis, but we can also see that Europe’s banks now have higher earnings and better asset quality. Overall, this explains why the banks are reasonably robust,’ said Jacob Gyntelberg.

Full disclosure

Denmark’s central bank, Danmarks Nationalbank, also conducts a stress test of the largest banks in Denmark twice a year.

But in this case the results for the individual banks are confidential. This is not the case with the EBA stress test. ‘Stress testing first began because there was previously some concern about which banks had the biggest risks. And that led to a loss of confidence in all of the banks. It is therefore important to us to provide a higher degree of transparency, including in relation to individual banks,’ explained Angel Monzon, Head of the EBA’s Risk Analysis and Stress Testing Unit.

Significant credit losses

The vast majority of the assets in a bank consist of loans. And, historically, economic downturns, and particularly rising unemployment, have almost always led to significant losses for banks, as customers are no longer able to pay back what they owe.

However, in recent years, banks in Denmark and Europe have hardly seen any losses on loans.

‘In recent years, we have seen that the proportion of non-performing loans has been very low, which not only reflects the fact that we have had several years with very low interest rates, but also government support packages, which we saw during the COVID-19 pandemic, which also helped the banks,’ said the EBA’s Jacob Gyntelberg.

‘High unemployment and negative growth still affect banks, but in our stress test banks expect an impact on their credit risk comparable to our stress test in 2021, even though this time we have scenarios that are more severe than in 2021. This is probably because the banks’ asset quality has improved thanks to the work of banks and authorities in recent years’, he continued.

According to the EBA director, bank customers are less likely to default on their loans, and the banks also have more over-collateralisation for the loans. This is because property prices have generally risen sharply, which means that banks’ mortgages make up a decreasing share of the property value, and thus the banks’ collateral for the loans increases.

But the EBA’s Jacob Gyntelberg also pointed out that there are new risks that can be difficult for banks to take into account.

'At present, there is a significant degree of macroeconomic uncertainty. We've gone from having very low interest rates to having sharp increases in both interest rates and inflation. And, as an economist, I think it’s a very big question what the effects of such large and sudden changes will be on our economy.'

Geopolitics is also difficult to capture in a stress test. We still have a war in Ukraine, which can still affect the price of energy and food, among other things. We do not have a crystal ball. And there are many unknowns. For example, how changes in global supply chains and big fluctuations in energy, food and commodity prices will affect banks’ loan books’, said Jacob Gyntelberg.

The interview was conducted by David Bentow

Børsen (Denmark)