FRANKFURT, July 19 (Reuters) - Euro zone banks would face a “material impact” on their capital and cash positions if interest rates rose abruptly, the International Monetary Fund said on Thursday, urging local watchdogs to sharpen up their analytical tools.
The warning, based on a stress test of the euro area banking sector, came as the European Central Bank began to pave the ground for the first interest rate hike in eight years, which investors now expected in late 2019.
The IMF estimated euro area banks would see their core capital fall to 10 percent in 2020 from 13.9 percent at the end of last year under “adverse conditions” which would challenge the firms’ solvency, liquidity and resilience.
That would wipe off all the capital built since the ECB took over as the euro zone’s top banking supervisor in 2014, when the average Core Equity Tier 1 ratio was 11.3 percent.
“Sensitivity tests show that an abrupt and sharp increase in rates can have a material impact on bank capital,” the IMF wrote.
It added that banks which were more dependent on ECB funding would be hit particularly hard and recommended that supervisors at the central bank made greater use of their data when carrying out their own stress tests.
The ECB will publish the results of its health checks in November.
“Further integrating supervisory data, especially related to market risk and cash flow based liquidity risks, into the existing stress testing infrastructure would facilitate higher frequency and more comprehensive risk monitoring,” the IMF said.
The Washington-based IMF periodically produces assessments of the financial sector of countries and regions, along with recommendations for local watchdogs. (Reporting By Francesco Canepa Editing by Raissa Kasolowsky)