HESSEN, GERMANY – Most big eurozone banks are well braced for possible future interest rate rises, the European Central Bank said Monday after running dozens of them through a stress test.
On a scale running from a top mark of 1 to the lowest of 4, 60 out of 111 banks scored 1 or 2 in the test, the ECB said.
For the first time, the stress test examined how sudden changes in interest rates will affect banks’ income and the value of their assets.
Of the other banks, 34 received a mark of 3 and 17 scored a 4.
“This was in line with our expectations,” said Korbinian Ibel, one of four heads of micro-prudential supervision at the ECB, which assumed the role of banking supervisor for the euro area in 2014.
On average, banks’ net interest income will decrease 7.5 percent by 2019 if interest rates remain at their present historic lows.
But if interest rates rise by 2.0 percentage points, that will boost banks’ net interest income by 10.5 percent over the same period.
Nevertheless, higher rates could have the negative impact of eroding the value of the banks’ assets, making them less attractive.
The results of the stress test will help the ECB decide how large a capital buffer banks must set aside to help weather financial shocks.
The exercise also provided valuable insight into how banks model and manage risks related to changes in interest rates, Ibel said.