EBA discloses Rabobank 2016 EU-wide stress test results
Rabobank was subject to the 2016 EU-wide stress test conducted by the European Banking Authority (EBA), in cooperation with De Nederlandsche Bank (DNB), the European Central Bank (ECB), the European Commission (EC) and the European Systemic Risk Board (ESRB).
Rabobank notes the announcements made today by the EBA on the EU-wide stress test and fully acknowledges the outcomes of this exercise.
Starting point in the stress test is the Common Equity Tier 1 (CET1) ratio as per 31 December 2015 (13.5% on a transitional basis or 12.0% on a fully loaded basis). In the stress test two scenarios were run: a baseline scenario (which reflects the European Commission’s autumn 2015 macroeconomic forecast) and an adverse scenario (which assumes a severe economic downturn). In the baseline scenario Rabobank keeps a strong capital buffer of 13.3%, whereas in the adverse scenario this ratio decreases to 8.1% in 2018. In interpreting these outcomes it is important to analyse the underlying macroeconomic scenarios and methodological assumptions.
The adverse stress test scenario was set by the ECB/ESRB and covers a three-year time horizon (2016-2018). The applied stress in terms of pressure on GDP growth in the Netherlands (Rabobank’s homemarket) is above the average of the euro area. Furthermore, an increase of interest rates is assumed.
For Rabobank the following elements of the methodology are most relevant. The stress test has been carried out applying a static balance sheet assumption as at December 2015, whereas operating expenses were floored at their 2015 level. Moreover, an assumption of the stress test is that banks have very limited ability to pass through increased funding costs to lending clients. At the same time, it is assumed that interest rates on savings accounts are raised at a faster pace than Rabobank has experienced in the past, even during the financial crisis.
Another element in the methodology is related to the accounting treatment of hedges, which translate into trading book losses. Although the overall position is neutral from an economic perspective, the EBA uses the historic marked-to-market volatility as a measure of the riskiness of our moderate trading book exposure.
Lastly, the stress test does not take into account future business strategies and management actions. Consequently it does not capture the effects of Rabobank’s strategic direction, that was announced in December 2015.
The bank is currently in the middle of executing its Strategic Framework 2016-2020, whereby it – amongst others – focuses on a strong minimum CET1 ratio of at least 14%. This will be achieved by a reduction of its balance sheet and an improvement of its financial performance. The balance sheet reduction will result in capital relief as well as lower wholesale funding needs.
Year-to-date Rabobank has already done several transactions to shrink its balance sheet and realised a headcount reduction of approx. 2,000 fte’s. These initiatives, which will further strengthen Rabobank’s financial position and hence make the bank more resilient to any adverse scenario, will be taken into account by the ECB during the supervisory review and evaluation process (SREP).
The 2016 EU-wide stress test does not contain a pass or fail threshold and instead is designed to be used as a crucial piece of information for the supervisory review process in 2016. The results will thus allow competent authorities to assess Rabobank’s ability to meet applicable minimum and additional own funds requirements under a stressed scenario based on a common methodology and assumptions.
The full results of Rabobank are available on the EBA website (via the link below)