Frankfurt (Reuters) - The EU banking authority EBA will be examining the resilience of European financial institutions in a large-scale stress test over the next few months.

This time, 70 financial institutions will take part in the regular stress test - 20 more than in the last stress test in 2021, the EBA announced on Tuesday. Among other things, the supervisors want to find out how banks can cope with a severe economic slump, as well as persistently high inflation and high interest rates. Among other things, banks have to show whether they still have sufficient capital in such a situation. The participating German financial institutions include Deutsche Bank, Commerzbank and DZ Bank. The EBA intends to publish the results at the end of July.

The hypothetical crisis scenario, which covers three years up to and including 2025, assumes a massive escalation in geopolitical tensions and a resurgence of the coronavirus pandemic. The EBA assumes that Russia will completely cut off gas supplies to the EU and that energy and commodity prices will skyrocket. Inflation in the EU is assumed to reach 9.7% in 2023. The high inflation rates and high interest rates dampen private consumption and investment in the crisis scenario. It predicts a decline in economic output of 6.0% in the EU by 2025 and an increase in the unemployment rate of 6.1 percentage points. A severe recession is assumed for 2023 and 2024. According to the EBA, this is the toughest crisis scenario for banks to date.

In their previous stress test in 2021, the regulators had still assumed prolonged low or negative interest rates in their negative scenario. However, the situation has now changed completely due to the war in Ukraine. Inflation rates in Europe have skyrocketed to levels not seen for decades. In the eurozone, inflation reached a level of 10.6 percent in October. The European Central Bank (ECB) has already raised interest rates four times in a row since July 2022, most recently by 0.50 percent in December. Another sharp rate hike is expected for the upcoming interest rate meeting this Thursday.

In their stress test, the supervisors also want to look in detail for the first time at how the shocks affect 16 sectors in which the banks are involved. The results of the EU-wide stress check are to be incorporated into the annual bank audit (SREP).

(Report by Frank Siebelt, edited by Ralf Banser; if you have any queries, please contact our editorial team at berlin.newsroom@thomsonreuters.com (for politics and the economy) or frankfurt.newsroom@thomsonreuters.com (for companies and markets)).