Stress Test for banks in times of Coronavirus

The coronavirus has led to huge uncertainties in global economies and thus in the financial industry. The ECB and the FED have flooded the markets with liquidity. Although banks have healthier capitalisations than before the 2008-2009 global financial crisis, even big banks can get in severe trouble because of the global pandemic.

“In a severely adverse scenario, for example, due to steeper stock market corrections that coincide with other shocks eroding bank capital, the Tier 1 capital to risk-weighted assets ratio of banks will likely move closer on average to the regulatory minimum of 8% and for some banks well below 8%”, emphasise Viral Acharya, Professor of Economics at Stern School of Business, and Sascha Steffen, Professor of Finance at Frankfurt School of Finance & Management.

Because of that, they argue that regulators should plan in advance for such a severe stress test by ensuring that banks prevent any further capital depletion through dividend payouts or share buybacks.

Together, both experts have simulated a stress test for the U.S. market. The paper was published on 19 March 2020. You can download the whole article here.