The Deutsche Bundesbank (BBk) and German Federal Financial Supervisory Authority (Bundesanstalt für Finanzdienstleistungsaufsicht – BaFin) launched their fifth stress test to assess the earnings and resilience of around 1,300 small and medium-sized banks under direct national supervision in Germany, the so-called less significant institutions (LSIs). This exercise was postponed from 2021 due to the COVID-19 pandemic. In parallel, a stress test will be conducted at all German Bausparkassen. As with previous LSI stress tests, the results will be used to determine the regulatory capital recommendation; however, this time proportionality is taken further into account. The banks must submit the data collected in the stress test to the supervisory authority by the end of May 2022. The results are expected to be published at the end of September 2022.
The LSI stress test consists of two components: a survey of the plan and forecast data of credit institutions and the effects of five interest-rate scenarios for the period from 2022 to 2026 and an actual stress test, in which institutions simulate their earnings and resilience for the years 2022 to 2024 in a baseline and in a stress scenario, which envisages a massive economic slowdown. The stress test involves modeling the banks' income statement and net interest income, credit risk and market risk components. The consumption of CET1 capital ratio is determined as the difference between the initial capital ratio and the lowest capital ratio in the three-year stress horizon.