The Deutsche Bundesbank and Federal Financial Supervisory Authority (Bundesanstalt fü Finanzdienstleistungsaufsicht - BaFin) launched their fourth stress test of around 1,400 nationally supervised banks (less significant institutions - LSIs) to determine regulatory capital target ratios and, in parallel, a stress test of German building societies. The institutions must deliver the requested data by the end of May 2019. The results are expected in autumn 2019.
The LSI survey consists of two parts. In the first part, the planned and forecast data of the banks are surveyed as well as their reaction to five interest-rate scenarios (including both a sustained low interest-rate environment and positive and negative interest-rate shocks) specified for the period from 2019 to 2023. In the second part, the institutions simulate their earnings and resilience for the years 2019 to 2021, for both a base scenario and a stress scenario that depicts a massive economic downturn. A new feature of the 2019 stress test is that the banks' income statements are modelled on the crisis scenario prescribed by the supervisory authorities. Although banks can generate income in the three-year stress horizon primarily from interest and commission business, they will also have to accept significant declines in earnings contributions in the stress scenario. As a result, the consumption of common equity Tier-1 (CET1) capital ratio is determined as the difference between the initial capital ratio and the lowest capital ratio in the stress horizon. At the same time as the stress test, the German supervisory authorities will survey selected institutions on risks arising from real-estate financing and on the development of lending standards in the corporate-lending business.