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UPDATE 1-ECB to test banks' resilience to interest rate shocks
February 28, 2017 / 5:56 PM / 6 months ago

UPDATE 1-ECB to test banks' resilience to interest rate shocks

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By Francesco Canepa

FRANKFURT, Feb 28 (Reuters) - The European Central Bank said it will test euro zone banks on their resilience to sharp changes in interest rates, simulating scenarios from sudden monetary tightening to the lending freeze that followed Lehman Brothers' collapse.

The ultra-low or negative ECB rates in place since the start of the financial crisis have eaten into banks' margins and led them to take on more risk for smaller returns, raising concerns about how the sector might cope once policy is tightened.

The ECB has said it would keep rates at current levels for a long time but euro zone inflation has been rebounding, fuelling calls for a tightening and for it to cut the pace of its 2.3 trillion euro ($2.44 trillion) bond-buying scheme.

Under the new stress test programme announced on Tuesday, the ECB wants to know how much capital banks would have left if interest rates suddenly rose or dropped and how much they would make over three years under the different scenarios.

The six simulations include a rerun of the aftermath of Lehman's bankruptcy in 2008 -- when long-term interest rates fell below short-term ones, signalling an impending recession -- as well as a return to the higher interest rates from before the start of the euro zone crisis in 2010.

The 110 largest euro zone banks in the test have until April to submit their data, which will then feed into the ECB's annual capital demands in July.

"This stress test exercise is designed to provide the ECB with sufficient information to understand the interest rate sensitivity of a bank," the ECB said.

Rising rates make it harder for some borrowers to repay loans and tend to depress the value of government bonds, which banks own in large quantities and use as collateral.

"The banks’ overall capital demand – requirements and guidance – is not expected to change, all else being equal," the ECB, which is the euro zone's primary banking supervisor, said.

$1 = 0.9421 euros Reporting By Francesco Canepa; editing by John Stonestreet

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