On 28 July 2020, the European Central Bank (ECB) published the aggregate results of its vulnerability analysis of banks directly supervised within the Single Supervisory Mechanism. The exercise assessed how the economic shock caused by the COVID-19 pandemic would impact 86 euro area banks and aimed to identify potential vulnerabilities within the banking sector over a three-year horizon. Overall, the results show that the euro area banking sector can withstand the pandemic-induced stress.
The vulnerability analysis focused different scenarios including one that ECB staff feel is the most likely to materialise with real gross domestic product (GDP) in the euro area declining by 8.7% in 2020, and GDP growth at 5.2% and 3.3% in 2021 and 2022, respectively. In this scenario banks’ average Common Equity Tier 1 ratio, a key indicator of financial soundness, deteriorated only by 1.9 percentage points to 12.6% from 14.5%. As a result, banks could continue fulfilling their role of lending to the economy.