Frankfurt am Main What are the implications of Covid-19 for the European banking industry? The Frankfurt Institute of Risk Management and Regulation (FIRM) examines the effects within the framework of a multi-part study. The focus is on risk provisioning and the question: Can European banks continue to provide the real economy with the necessary credit volume? This is a crucial prerequisite for the expected economic upturn in 2021.
The first publication uses stress test modelling to make forecasts on the resource endowment of European banks. The most important drivers here are loan loss provisions and credit RWAs. The results of the stress test show that the European banking sector was basically well prepared and able to cope with the effects of the Covid 19 crisis so far.
Crisis will manifest itself particularly in Southern Europe
In terms of CET1 ratios, the crisis is likely to manifest itself particularly in Southern Europe, where banks may occasionally fall below their minimum capital requirements. However, should the more severe economic scenario materialise, it is also to be expected that individual banks will no longer be able to meet the requirements in many other European countries such as France, Austria, the UK, the Netherlands and also Germany.
Further measures needed in the second wave
The comprehensive measures introduced by policymakers and supervisors successfully reduced the short-term negative effects of the first wave. With a view to the second wave, it must be examined in time whether and which further measures are necessary to prevent the crisis from spreading in the banking and/or real economy.
The study will be continued and in the next step will examine how already initiated and still possible measures by politics, supervision and central banks affect banks and the real economy.