The purpose of the stress test is to assess the robustness of the European banking sector in the event of a very severe economic setback. According to the test, Danske Bank would have to use parts of its combined capital buffers in such a macroeconomic scenario.
“The 2021 EU stress test uses a very severe macroeconomic scenario, despite being applied to an already stressed starting point due to the corona crisis. In the scenario, house prices for instance fall by more than 30% on average in the Nordic countries. Not even during the financial crisis did we see such effects. Furthermore, the stress test uses a very harsh method where any measures taken by management to mitigate the effect of the given scenario are not permitted. In this highly unlikely situation, we would have to use parts of our combined capital buffers, and this is precisely the purpose of such buffers,” says Stephan Engels, Chief Financial Officer at Danske Bank.
“We remain one of the best capitalised banks in Europe, and we continue to meet the requirements imposed by the Danish Financial Supervisory Authority. This stress test with the very severe scenario does not cause us to change our capital management or dividend policies,” he continues.
Very severe adverse scenario
The stress test is based on reported risks and financial figures at 31 December 2020, and it comprises two macroeconomic scenarios for the years 2021-2023 – a base scenario and an adverse scenario. The stress test was carried out applying a static balance sheet assumption and therefore does not consider possible actions to mitigate the effect of the scenarios.
The adverse scenario describes a very severe economic setback with negative GDP growth, sharp falls in residential and commercial property prices and increasing unemployment. The fall in residential and commercial property prices is much sharper in the Nordic countries under the adverse scenario than for the EU as a whole.
The result of the stress test is that the Danske Bank Group’s common equity tier 1 (CET1) capital ratio at the end of 2023 would be 11.5% and 18.9% on transitional figures, respectively, in the adverse and base scenarios. The Danske Bank Group’s total capital ratio at the end of 2023 would be 15.6% in the adverse scenario and 23.5% in the base scenario on transitional figures.
A CET1 capital ratio of 11.5% at the end of 2023 would mean that Danske Bank would have to use 1.6 percentage points of its combined capital buffers in the adverse scenario.
A total capital ratio of 15.6% at the end of 2023 would mean that Danske Bank would have to use 2.5 percentage points of its combined capital buffers in the adverse scenario.
The results of Danske Bank’s stress test are available at danskebank.com/stress-test