Adverse scenario for Cyprus banks drawn up as part of EU stress tests

The European Banking Authority (EBA) has launched its 2021 EU-wide stress test, publishing the scenarios for the exercise, including those concerning Cyprus.

Although Cypriot banks are not included in the sample, Cyprus’ systemic banks will take part in the exercise with the results incorporated in the Supervisory Review and Evaluation Process (SREP TEST).

The results for the participating banks included in the sample will be published on July 31, the EBA said.

The 2020 stress tests were postponed due to the coronavirus pandemic.

“Following the postponement of the 2020 exercise due to the Covid-19 pandemic, this year’s EU-wide stress test will provide valuable input for assessing the resilience of the European banking sector,” the EBA said.

The test’s adverse scenario is based on a narrative of a prolonged Covid scenario in a ‘lower for longer’ interest rate environment, in which negative confidence shocks would prolong the economic contraction.”

According to the EBA, the baseline scenario for Cyprus provides for a growth rate of 4.1 per cent of GDP in 2021, followed by 3.4 per cent in 2022, and 2.7 per cent in 2023.

The adverse scenario projects contraction of 0.8 per cent in 2021, followed by -0.9 per cent and -0.4 per cent in 2022 and 2023 respectively.

Unemployment is expected to rise to 7.1 per cent in 2021 according to the baseline scenario and to decline to 6.8 per cent and 6.3 per cent in 2022 and 2023 respectively.

The adverse scenario, however, projects a jobless rate of 8.1 per cent in 2021 followed by 10 per cent in 2022 and 12.8 per cent in 2023.

The EBA also projects prices of residential real estate to rise by 0.3 per cent in 2021 in the baseline scenario to continue rising by 0.3 per cent in both 2022 and 2023. The adverse scenario projects a price reduction of 1.7 per cent in 2021 followed by -2.0 per cent in 2022 and -0.4 per cent in 2022 and 2023 respectively.

As regards commercial real estate prices in Cyprus, the EBA’s baseline scenario projects an increase of 0.3 per cent in 2021 to 2023, while the adverse scenario marks a steep reduction of 10.2 per cent in 2021, 6.8 per cent in 2022 and 2.4 per cent in 2023.