ECB adds two indicators to track euro area bank vulnerabilities between stress tests
The European Central Bank has developed quarterly indicators to track euro area banks’ potential capital losses and pressure on current earnings between regular stress tests, according to Cyprus Mail. The ECB paper says the measures can help supervisors assess vulnerabilities and decide whether to maintain, strengthen or release capital buffers.
Bottom line — The ECB paper says the Stress Vulnerability Index remained slightly elevated even as the Profitability Vulnerability Index improved.
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The Stress Vulnerability Index estimates potential capital depletion under adverse scenarios, especially from loan losses, Cyprus Mail reports.
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The Profitability Vulnerability Index tracks pressure on current earnings and banks’ ability to build capital from interest and operating profits, according to Cyprus Mail.
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The indicators draw on EU-wide solvency stress tests conducted every two years by the ECB and the European Banking Authority, Cyprus Mail reports.
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Both indices rose during the global financial crisis and the European sovereign debt crisis; the profitability measure climbed more sharply during acute periods of stress, according to the ECB paper as reported by Cyprus Mail.
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The ECB researchers found both measures were statistically associated with the likelihood of banks receiving state aid after the global financial crisis, Cyprus Mail reports.