The European Central Bank on Tuesday launched a banking stress test across the EU, in which the Bank of Cyprus and Hellenic Bank will participate.
The macroeconomic scenario with baseline assumptions for Cyprus providing for GDP growth of 2,5% this year followed by 3.1% for 2024 and 2025 respectively.
According to a press release, ECB supervisors will examine 57 banks in the EU, selected to cover broadly 75% of the area’s banking assets, as part of the 2023 EU-wide stress test coordinated by the European Banking Authority (EBA), while in parallel the ECB will conduct its own stress test for another 42 medium-sized banks that are not included in the EBA-led stress test.
“The results will shed light on the impact of adverse shocks on banks’ resilience under challenging macroeconomic conditions,” the ECB noted.
The scenarios for Cyprus
Under the baseline scenario, the Cypriot economy is projected to grow at a rate of 2.5% in 2023 with GDP expanding by 3.1% in 2024 and 2025 respectively.
The adverse scenario provides for a contraction amounting to 1.6% this year followed by a deeper recession in 2024 while the economy will return to growth in 2025. For 2024 GDP is projected to shrink by 4.6% and will recover by 1.4% in 2025.
Inflation is projected at 3.3% this year and will decelerate to 1.7% and 1.8 in 2024 and 2025 respectively under the baseline scenario, while the adverse scenario provides for 5.5% this year followed by 4.3% and 5.3% in 2024 and 2025.
Under the baseline projections, unemployment is projected to amount to 6.5% this year and will decline to 5.9% in 2025 and to 5.5% in 2024. However, under the adverse scenario, unemployment will jump to 7.2% this year and will further accelerate to 9.5% in 2024 and peak at 12.5% in 2025.
Residential real estate (RRE) prices under the baseline scenario will rise by 3.7% this year and will continue rising albeit with a smaller rate to 1.4% and 1.5% in 2024 and 2025, while under adverse projections RRE prices will decline by 1.5% this year followed by a steep drop of 6.5% in 2024 and by -0.1% in 2025.
Furthermore, Commercial Real Estate (CRE) prices under the baseline scenario will mark an increase of 1.8% in the period of 2023 – 2024, while the adverse scenario features a plunge of 8.9% in 2024 and will continue declining by 5.8% and 2.1% in 2024 and 2025 respectively.
According to the ECB, in the 2023 exercise, banks will, for the first time, use prescribed parameters for net fee and commission income, while another novelty is that banks will report their provisions for expected losses at sectoral level based on sector-specific projections in the scenarios.
In addition, in the context of its quality assurance of banks’ submissions, the ECB will carry out a deep dive on leveraged finance exposures for selected banks with material leveraged finance activities.