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EU-wide stress testing exercise

The Committee of European Banking Supervisors (CEBS), in cooperation with the European Central Bank (ECB), carried out an EU-wide stress testing exercise aiming at assessing the resilience of a representative set of EU individual banks to an extreme but plausible adverse scenario. In Portugal, this exercise was conducted by Banco de Portugal in a top-down fashion.

In the Portuguese case, the top-down stress test exercise was conducted for the four largest banking groups, involving also the banks’ employees pension funds, accounting for almost two thirds of total assets of the Portuguese banking system in 2009. Note that Banco Santander Totta, which accounts for 8.8 percent of banking system’s total assets, was not included. Rather, it participated in the stress test exercise conducted by Banco de España as a subsidiary of Banco Santander, given that the EU-wide exercise entailed banking groups to be tested on the highest consolidated level. Therefore, overall, around 74 percent of the Portuguese banking system was covered in the exercise. The benchmark and adverse scenarios were developed by the CEBS in close cooperation with the ECB and the European Commission, and include a severe combination of credit and market shocks, including sovereign risks, calibrated for 2010 and 2011. The starting-point of the exercise in terms of accounting and prudential information was December 2009.

The main results of the stress test exercise for Portugal are the following: all four Portuguese banking groups revealed a high degree of resilience to the adverse scenario. All banking groups present Tier 1 ratios in excess of 6 per cent in both 2010 and 2011, in spite of a significant fall in profitability and solvency in the adverse scenario, vis-à-vis the benchmark. The exercise thus calls for no recapitalization measures in the case of Portuguese banks.