Supervisory stress tests again prove that banks and insurance companies are resilient
In September, the Czech National Bank completed this year’s round of supervisory stress tests of banks and insurance companies. Their results demonstrated that the two sectors are still prepared to withstand a deterioration in economic conditions. The tests used data as of the end of 2020.
For the supervisory stress test of banks, the European Banking Authority (EBA) methodology was applied as usual, adjusted to the conditions of the Czech banking sector. A total of 15 domestic banks were selected for the stress test, accounting for around 90% of the assets of the Czech banking sector. The stress tests covered credit, market and operational risk, interest and non-interest income and expenses, and capital in the Baseline and Adverse Scenarios.
The aggregate results of the supervisory stress tests of banks subject to CNB supervision confirmed that those banks are resilient to hypothetical adverse economic developments due to a strong initial capital ratio. At the end of 2020 it stood at 22.6%. The capital ratio of the part of the banking sector tested would drop to 18% 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.
A total of 20 domestic insurance companies, accounting for 99.6% of the market of domestic insurance companies in 2020 based on gross premiums written, participated in the supervisory stress tests of insurance companies 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). It was focused on testing the impact of market risks, catastrophic flood damage 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 aggregate results of the stress test demonstrated that the insurance sector had sufficient own funds at the end of 2020 and was able to absorb relatively significant changes in risk factors. The overall solvency ratio of the insurance companies tested would be 173% after the application of shocks for market and insurance risks, and would thus be relatively high above the regulatory minimum of 100%. Of the risks under review, the equity risk and the risk of a decrease in government bond prices had the largest impact.
- Supervisory stress test of selected banks 10/2021 (pdf, 349 kB)
- Supervisory stress test of selected banks 10/2021 – underlying data (xlsx, 36 kB)
- Supervisory stress tests of selected insurance companies 10/2021 (pdf, 278 kB)
- Supervisory stress tests of selected insurance companies 10/2021 – underlying data (xlsx, 72 kB)
Director of the Communications Division and CNB Spokesperson
Notes for journalists:
The Czech National Bank is the central bank of the Czech Republic and the supervisor of the Czech financial market. The objective of the CNB is to maintain price and financial stability. The CNB sets monetary policy, issues banknotes and coins and manages the circulation of currency, the payment system and settlements between banks. It also performs supervision of the banking sector, the capital market, the insurance industry, pension funds, credit unions, electronic money institutions and non-bank consumer credit providers.
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 scenarios for the individual stress tests are prepared by the CNB.
The CNB uses supervisory stress tests to assess the resilience of individual banks and insurance companies. The tests are conducted every two years 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, non-financial corporations and the investment funds sector as a whole. In addition, the CNB performs stress tests of the public finances of countries to which domestic credit institutions have systemically important sovereign exposures and of households that have credit from domestic credit institutions.