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Results of 2021 Supervisory Stress Test on Domestic Banks


  The spread of COVID-19 pandemic since 2020 has led to drastic changes in the international economic and financial conditions and increased uncertainty in the overall business environment. The Financial Supervisory Commission (FSC) requested 36 domestic banks to conduct the "2021 Supervisory Stress Test" to understand the impact of the low interest rate environment and the impact of the pandemic on the capital adequacy of domestic banks. The banks should calculate the changes in capital adequacy ratios and leverage ratios based on the capital adequacy data as of the end of 2020 under consistent stress test scenarios, and report the test results before the end of April 2021.
The test scenarios include adverse scenario and severely adverse scenario. The test factors include decreased economic growth in Taiwan and major countries, increased domestic unemployment, and decreased housing prices, which increased expected losses in credit risks and losses due market risks exacerbated by the increased volatility in the prices of bond, equity, foreign exchange, and commodity markets. Besides, the impact of narrowing interest margin  and reduced fees and commission income on earnings are also considered to measure banks' risk bearing capacity under stress. In addition, the operational risk stress scenario is firstly introduced in which a bank is fined by the FSC for fraud committed by a bank clerk, and required to increase its operational risk capital as a result.
The results of the stress test showed that the average common equity ratio, tier 1 capital ratio, capital adequacy ratio, and leverage ratio of 36 domestic banks under the adverse scenario were 10.72%, 11.68%, 13.42%, and 6.11%, respectively; the ratios under the severely adverse scenario were 9.68%, 10.64%, 12.33%, and 5.60%, respectively. All ratios were above the statutory minimum standards (7%, 8.5%, 10.5%, and 3%, respectively, for the four aforementioned ratios). These results indicate that domestic banks have maintained strong capacities for bearing risks and capital adequacy in response to the impact of the epidemic on the global economy and changes in the financial environment.
According to the FSC, the test indicated that the potential increase in losses under stress may place a certain level of pressure on banks' profitability, but they remain within an acceptable scope for the banks. The overall loan loss provisions of domestic banks remain at a relatively high level and banks still retain high capital adequacy. The FSC will continue to monitor overall risks of the banks and ensure that the banks will continuously improve the quality of their assets and financial structure to respond to changes in the business environment and enhance their loss provisions and risk bearing capacity.
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  • Update: 2021-06-29