The European Banking Authority (EBA) on Friday launched the 2021 EU-wide stress test, publishing the scenarios for the exercise, including those for Cyprus.
Although Cypriot banks are not included in the sample of banking institutions, 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 2021, 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, adding that the test’s adverse scenario is based on a narrative of a prolonged COVID-19 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 amounting to 4.1% of GDP in 2021, followed by 3.4% in 2022 and 2.7% in 2023. The adverse scenario projects contraction amounting to 0.8% in 2021 followed by -0.9% and -0.4% in 2022 and 2023 respectively.
Unemployment is expected to amount to 7.1% in 2021 according to the baseline scenario and to decline to 6.8% and 6.3% in 2022 and 2023 respectively. The adverse scenario, however projects jobless rate of 8.1% in 2021 followed by 10% in 2022 and 12.8% in 2023.
The EBA also projects prices of residential real estate to rise by 0.3% in 2021 in the baseline scenario and to continue rising by 0.3% both in 2022 and 2023. The adverse scenario projects a price reduction amounting to 1.7% in 2021 followed by -2.0% in 2022 and -0.4% in 2022 and 2023 respectively.
For commercial real estate prices in Cyprus, the EBA’s baseline scenario projects an increase of 0.3% in 2021 to 2023, while the adverse scenario marks a steep reduction of 10.2% in 2021, 6.8% in 2022 and 2.4% in 2023.
Harmonized inflation is expected to amount to 0.5% in 2021 followed by 0.9% in 2022 and 1.45% in 2023 while the adverse scenario projects a negative HICP amounting to -1.7% in 2021, -2% in 2022 and -0.4% in 2023.
According to the EBA, the baseline scenario for EU countries is based on the projections from the national central banks of December 2020, while the adverse scenario assumes the materialisation of the main financial stability risks that have been identified by the European Systemic Risk Board (ESRB) as well as the assessments by the EBA.