Look How Conveniently The Stress Test's Calculated Bank Income Offsets Calculated Debt Losses

We’re not privy to the exact underlying calculations here… but we just have to point out how conveniently the stress test has forecast banks’ income to boost Tier 1 ratios (capital levels relative to risk-weighted assets) by just the right amount to offset forecast impairment losses from bad debt.

Look below:


Looking at the decomposition of the effect of different component on the Tier 1 capital ratio under the adverse scenario (see Chart 3), one can see that the aggregate ratio is driven up by the pre-impairment income leading to the increase of ratio by 4.5 percentage point, offset by the same proportion by impairment charges associated with the impact of the adverse scenario after sovereign shock. The trading losses have a marginal impact on the composition of the aggregate Tier 1 capital ratio, driving it down by 0.2 percentage points including the impact of 24.0 bn € stemming from the application of an haircut on European sovereign debt holdings in the trading book (see Section 4.1.1).


+4.5%, then -4.5%. Which means the overall Tier 1 capital ratio isn’t hit that badly under this ‘stress’ test.

Keep in mind as well that this stress test only calculated effects for sovereign debt banks classify as ‘trading’ assets and not those classified as ‘ held to maturity’.

Business Insider Emails & Alerts

Site highlights each day to your inbox.

Follow Business Insider Australia on Facebook, Twitter, LinkedIn, and Instagram.