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 2018.
For the supervisory stress tests of banks, the CNB for the second time applied the European Banking Authority (EBA) methodology, adjusted to the conditions of the Czech banking sector. The tests were extended from the largest banking groups, which were tested last year, to almost all banks subject to CNB supervision. The banks tested thus account for around 91% of the assets of the Czech banking sector (as compared to 76% last year). The tests covered credit, market and operational risk, interest and non-interest income and expenses, and capital.
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. The capital ratio of the part of the banking sector tested would drop to 14.8% under a stress scenario assuming a sizeable decline in economic activity in the Czech Republic and abroad. However, it would remain well above the regulatory minimum of 8%. The banking groups’ resilience is based mainly on their initial capital ratio, which amounted to 18.4% at the end of 2018. Resilience was also aided by the return on assets and return on equity of the banking groups tested, which stood at 1.2% and 16.2% respectively at the end of 2018. As usual, credit risk had the most significant impact of the risks under review.
A total of 18 domestic insurance companies, accounting for 98% of the domestic insurance market in 2018 based on gross premiums written, participated in the 2019 supervisory stress tests of insurance companies. 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 investment risks, the risk of claims due to natural disasters, the risk of a decrease in non-life insurance premiums and newly also the risk of an immediate lapse of 10% of the insurance company’s life insurance portfolio.
The aggregate results of the stress test demonstrated that the insurance sector had sufficient own funds to absorb relatively significant changes in risk factors at the end of 2018. The overall solvency ratio of the insurance companies tested was 157% even after the application of shocks for market and insurance risks and was thus relatively high above the regulatory minimum of 100%. Of the risks under review, equity risk and the risk of a drop in government bond prices had the largest impact.
Markéta Fišerová
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 once a year 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 and the pension management companies 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.