Vladimír Urbánek (Kurzy.cz)
Finance  |  November 29, 2010 10:52:40

CNB - results of stress tests of banks: In the worst scenario, even potřebovalyí banks increased by 10.9 billion

The results of recent stress tests of the banking sector in the Republic, which were performed on the data to the third quarter of 2010, continues to confirm the sufficient stability of the banking sector's potential negative shocks. Capital endowment of the sector would remain above the regulatory minimum of 8% for extreme and highly unlikely scenario stress that combines unfavorable domestic and international economy and the renewed uncertainty in financial markets caused financing problems of government debt.

First Introduction
Czech National Bank regularly evaluates through stress tests and adverse effects significantly less likely scenarios for future economic development in the domestic banking sector resilience. This paper presents the results of November's stress tests that were performed on the data at 30 9th2010 and focus on the horizon the next two years. When evaluating the impact resistance was tested in the future economic development represented by one basic and one load scenario for selected variables characterizing the health of the banking sector.

Second Macroeconomic Scenarios
The baseline scenario corresponds to the November official macroeconomic forecasts published in the CNB's Inflation Report IV/2010. The scenario assumes slow economic growth that is forecast over the previous August, slightly weakened because of government austerity measures. Inflation in the next two years remains close to 2% inflation target, the exchange rate strengthened slightly and short-term interest rates are stable in the following period and gradually grow from the first quarter of 2012.

Load fiscal crisis scenario is based on highly unfavorable and highly unlikely the trend of economic activity in the CR, which is caused by a decline in demand abroad because of renewed uncertainty about the financing of government debt of euro area countries. Scenario that the banking sector exhibits extreme stress, it is assumed that the concerns about the sustainability of public finances would also transferred to the CR: there would be a depreciation of the exchange rate and the problems the government to sell on reasonable terms in the primary market
new bonds. Nervousness would take on the secondary market, where there has been a sharp rise in long-term yields and a decline in the value of government bonds CR. Induced inflationary pressures will cause the reaction of monetary policy and the subsequent increase in short-term interest rates. The proposed scenario can be considered very significant stress and unlikely.

Third The impact of macroeconomic scenarios on the banking sector
The proportion of non-performing loans (NPL Non-Performing Loans) to total loans in non-financial corporate sector continues to grow for the baseline scenario and reaches a peak in the last quarter of next year with a value of 11.4%. For the sector of the population in the baseline scenario is only a slight increase in the share of NPLs in the following year, giving way to a gradual decrease to a value close to 5.5%. Load scenario would be reflected in higher credit risk and increase the share of NPLs so in this scenario moves to significantly higher levels (Figures 5, 6). Impairment of loans in 2011 could reach nearly 4% of the loan portfolio, more than twice the value of 2009 (1.9%). Parallel would be
banking sector hit by a relatively high market losses due to falling prices of government bonds held by the CR. Strongly negative scenario would also lead to some reduction of loan portfolios due to both low demand for loans, partly because of limited supply in the tightening of credit standards.

While the baseline scenario envisages the creation of operating profit for the next period at a similar level as last year, in a stress scenario, the fiscal crisis leads to the significant decrease of 30-40%. Some banks in the stress case scenarios themselves in a situation of total losses from operations, which significantly reduces the value of regulatory capital.

Despite the relatively high credit and market losses and weak operating profits of the banking sector remains stable as a whole in both macroeconomic scenarios and the aggregate capital adequacy ratio is always above the regulatory minimum of 8% (Figure 7). This result is achieved despite a number of conservative assumptions set various scenarios that assume more pessimistic development. One of the reasons of stability
banking sector remains its high capital adequacy, which in comparison
with previous tests of August 2010 (dates to at 30.6.2010) also slightly increased and the end of September amounted to almost 15.5%.

In the event of extremely adverse stress scenario, fiscal crisis, several banks in a situation of insufficient capital adequacy. To Match the capital adequacy of banks based in the CR (ieno branches of foreign banks) to the regulatory minimum of 8% of the banks at the end of the test period have to increase regulatory capital by almost CZK 10.5 billion (ie about 0.3% of GDP). In terms of sector size is not a significant enough value that could threaten the stability
banking sector.

Czech National Bank
Contact: @ financial.stability cnb.cz
This document is located on the CNB website

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