Stress tests again prove that domestic banks and insurance companies are highly resilient

Czech banks and insurance companies are still able to withstand a worsening of economic conditions. The banking sector has an adequate capital buffer, which allows it to withstand even strongly negative shocks. Insurance companies are also sufficiently capitalised and can absorb relatively significant changes in risk factors. This is indicated by the results of the supervisory stress tests conducted by the Czech National Bank.

The results of the supervisory stress tests of banks subject to CNB supervision confirmed that the banking sector is resilient to hypothetical adverse economic developments due to strong initial capitalisation. The consolidated capital ratio of the part of the banking sector tested stood at 20.2% at the end of 2022 and would drop to 17.5% under the Adverse Scenario assuming a strong decline in economic activity in the Czech Republic and abroad. However, the total capital ratio of the part of the banking sector tested remained well above the regulatory minimum of 8%, proving that the sector currently has an adequate capital buffer, which allows it to absorb even strongly negative shocks.

For the supervisory stress test of banks, the European Banking Authority (EBA) methodology was applied, adjusted to the conditions of the Czech banking sector. The CNB selected a total of 12 domestic banks for the stress test, accounting for around 91% of the assets of the Czech banking sector. Using data as of the end of 2022, the CNB tested credit, market and operational risk, interest and non-interest income and expenses, and capital in the Baseline and Adverse Scenarios.

The results of the stress test of insurance companies demonstrated that the insurance sector as a whole had sufficient own funds at the end of 2022 and was able to absorb relatively significant changes in risk factors. The overall solvency ratio of the insurance companies tested would be 156% after the application of shocks for market and insurance risks, and would thus be sufficiently high above the regulatory minimum of 100%. Of the risks tested, the risk of a decline in the value of equity investment and of a decline in the value of government bonds had the largest impact on insurance companies.

A total of 18 domestic insurance companies, accounting for 99.9% of the market of domestic insurance companies in 2022 based on gross premiums written, participated in the supervisory stress tests this year. The stress test assessed the impact of shocks for individual risks on each insurance company’s solvency ratio (i.e. the ratio of eligible own funds to the solvency capital requirement) using end-2022 data. It was focused on testing the impact of market risks, natural catastrophe risk, the risk of a decrease in non-life insurance premiums and the risk of an immediate lapse of part of the insurance company’s life insurance portfolio.

The CNB uses stress testing as a tool for assessing the resilience of financial institutions registered in the Czech Republic and of the financial system as a whole. The CNB uses supervisory stress tests to assess the resilience of individual banks and insurance companies. The tests have been conducted every two years since 2019 in cooperation with selected banks and insurance companies. The CNB uses the results for supervisory purposes and to evaluate banks and insurance companies. The CNB also conducts macro stress tests, which assess the resilience of the banking sector, the insurance sector, the pension management companies sector and the investment funds sector as a whole. The results of macro stress tests are published in the Financial Stability Report.

Petra Krmelová
Director of the Communications Division and CNB Spokesperson