2010

RESULTS OF THE EU-WIDE STRESS TESTING EXERCISE

The Central Bank of Cyprus announces the stress test results for Bank of Cyprus and Marfin Popular Bank which were subject to the 2010 EU-wide stress testing exercise coordinated by the Committee of European Banking Supervisors (CEBS), in cooperation with the European Central Bank and Central Bank of Cyprus.

The Central Bank of Cyprus acknowledges and accepts the outcome of the
EU–wide stress tests and wishes to express its deep satisfaction with the individual results of the two Cypriot Banks, as they demonstrate the ability of the domestic banking sector to withstand shocks under adverse scenarios.

This stress test complements the risk management procedures and regular stress testing programmes set up in the two banks under the Pillar 2 framework of the Basel II and CRD[1] requirements and the Central Bank of Cyprus directive on the calculation of capital requirements and large exposures.

The exercise was conducted using the scenarios, methodology and key assumptions provided by CEBS (see the aggregate report published on the CEBS website[2]). As a result of the assumed shock under the adverse scenario, the estimated consolidated Tier 1 capital ratio for Bank of Cyprus would change to 9,4% in 2011 compared to 10,5% as of end of 2009 and for Marfin Popular Bank it would change to 8,5%[3] in 2011 compared to 9,4% as of end of 2009. An additional sovereign risk scenario would have a further impact of 1,4 percentage point on the estimated Tier 1 capital ratio of Bank of Cyprus, bringing it to 8,0% at the end of 2011 and 1,4 percentage point to 7,1% for Marfin Popular Bank, compared with the CRD regulatory minimum of 4%.

The results of the stress test suggest a buffer of 470 mln EUR of the Tier 1 capital of Bank of Cyprus and a buffer of 302 mln EUR for Marfin Popular Bank against the threshold of 6% of Tier 1 capital adequacy ratio agreed exclusively for the purposes of this exercise. This threshold should by no means be interpreted as a regulatory minimum (the regulatory minimum for the Tier 1 capital ratio is set to 4%), nor as a capital target reflecting the risk profile of the institution determined as a result of the supervisory review process in Pillar 2 of the CRD.

Details on the results of the stress testing exercise as well as information on the sovereign exposures of the two banks, are provided in the attached tables. The two banks have also published details of the results of the stress test on their websites[4].

Given that the stress test was carried out under a number of key common simplifying assumptions (e.g. constant balance sheet) the information on benchmark scenarios is provided only for comparison purposes and should in no way be construed as a forecast.

In the interpretation of the outcome of the exercise, it is imperative to differentiate between the results obtained under the different scenarios developed for the purposes of the EU-wide exercise. The results of the adverse scenario should not be considered as representative of the current situation or possible present capital needs. A stress testing exercise does not provide forecasts of expected outcomes since the adverse scenarios are designed as "what-if" scenarios including plausible but extreme assumptions, which are therefore not very likely to materialise. Different stresses may produce different outcomes depending on the circumstances of each institution.

Background

The objective of the 2010 EU-wide stress test exercise conducted under the mandate from the EU Council of Ministers of Finance (ECOFIN) and coordinated by CEBS in cooperation with the ECB, national supervisory authorities and the EU Commission, is to assess the overall resilience of the EU banking sector and the banks’ ability to absorb further possible shocks on credit and market risks, including sovereign risks.

The exercise has been conducted on a bank-by-bank basis for a sample of 91 EU banks from 20 EU Member States, covering at least 50% of the banking sector, in terms of total consolidated assets, in each of the 27 EU Member States, using commonly agreed macro-economic scenarios (benchmark and adverse) for 2010 and 2011, developed in close cooperation with the ECB and the European Commission.

More information on the scenarios, methodology, aggregate and detailed individual results of all the banks that participated in the exercise is available from CEBS[5].