This year’s supervisory stress tests again prove that banks and insurance companies are resilient

In September 2018, the Czech National Bank completed this year’s round of supervisory stress tests of banks and insurance companies. The tests, which covered selected banking groups and insurance companies and used data as of the end of 2017, demonstrated that the two sectors are still prepared to withstand a deterioration in economic conditions.

For the supervisory stress tests of banks, the CNB for the first time applied the European Banking Authority (EBA) methodology, which it adjusted to the conditions of the Czech banking sector. In addition to credit risk, which had already been tested in the past, the tests covered market and operational risk, interest and non-interest income and expenses and capital.

The aggregate results of the supervisory stress tests of the largest domestic banking groups, accounting for 76% of the assets of the Czech banking sector, confirmed that those groups are resilient to hypothetical adverse economic developments. The capitalisation of the part of the banking sector tested would remain well above the regulatory minimum of 8% even if a stress scenario assuming a sizeable decline in economic activity in the Czech Republic and abroad were to materialise. The banking groups’ resilience is based mainly on their initial capital ratio, which amounted to 18.2% at the end of 2017. Resilience was also aided by the return on assets and return on equity of the banking groups tested, which stood at 1.2% and 15.7% respectively at the end of 2017. As usual, credit risk had the most significant impact of the risks under review.

A total of 18 domestic insurance companies, accounting for 93% of the domestic insurance market in 2017 based on gross premiums written, participated in the 2018 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 and, for non-life insurance, also the risk of a decrease in premiums.

The aggregate results of the stress test demonstrate that the insurance sector had sufficient own funds to absorb relatively significant changes in risk factors at the end of 2017. The overall solvency ratio of the insurance companies tested was 177% 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.