Eurozone banks are well prepared for high interest rate volatility, the European Central Bank (ECB) said Monday after simulating various scenarios ranging from a sudden monetary tightening to a paralysis of the interbank market such as the one which followed the bankruptcy of Lehman Brothers in 2008.
These results are being released as the ECB prepares to begin reducing its accommodating policy after years of ultra-low interest rates and massive bond purchases.
The ECB found that higher interest rates would result in higher net interest income for the majority of the 111 banks subject to its stress tests over the next three years but also by reducing the value of their own funds .
The results of the tests, begun in February, will be incorporated into the ECB's broader review of banks to determine the amount of capital that each institution must hold. "If the demand for capital for each bank could be adapted to the identified risks, the aggregate demand will not be modified in the light of the analysis on interest rate sensitivity, all the rest being equal," declared the issuer.
As part of its tests, the ECB modelled six assumptions of a rate shock to determine how the net interest income and the capital value of the banking book would change in each situation. Banks, particularly in Germany, have long complained about ultra-low interest rates that are compressing their margins.
The supervisory body of the ECB in charge of these tests is officially distinct from the one which determines the monetary policy.
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