Macroprudential Stress Test of the Euro Area Banking System Amid the Coronavirus (COVID-19) Pandemic

The macroprudential stress test for 2021-23 aims to provide insights into the resilience of the European banking sector following the coronavirus (COVID- 19) crisis. The assessment builds on a macro-micro model with individual euro area economies and significant banks, and the two scenarios from the 2021 EU- wise stress test exercise. In the baseline scenario, the system-wide transitional CET1 ratio goes down from 15.5% in 2020 to its pre-pandemic level of 14.4%. In the adverse scenario, the CET1 ratio drops by 5.2 percentage points from 15.5% in 2020 to 10.3% in 2023. Macro-financial amplification in the macroprudential stress test results in higher capital depletion in the adverse scenario compared to the EBA/Single Supervisory Mechanism (SSM) stress test. Bank lending expands in the baseline scenario and shrinks in the adverse scenario. The outstanding COVID-19 mitigation policies have a pronounced positive lending effect, especially in the adverse scenario. The banking sector-real economy feedback loop amplifies the severity of the adverse scenario. The adopted assumption on banks’ intentions to use capital buffers can affect the outcomes of the macroprudential stress test