A problem with stress tests of euro-zone banks: The unstable correlation between GDP growth, bankruptcies and financial markets

The assumptions of the risk scenario used for stress tests of European banks in 2021 are now well known: 3.6% fall in GDP, 16.1% fall in real estate prices, 31.2% fall in commercial real estate prices, 50% fall in share prices , 4.7 percentage point rise in the unemployment rate. But there is a profound conceptual problem with these assumptions: the unstable correlation between GDP, unemployment, bankruptcies and financial markets. When we look at the COVID crisis, we actually see a far weaker effect of the decline in activity on unemployment, bankruptcies, real estate prices, share prices and credit spreads, which is due to well-known causes: The strong fiscal policy response; The strong monetary policy response and money creation, which have boosted asset prices; The absence of a banking crisis , unlike 2008-2009, and the absence of credit rationing. We can therefore defend the idea currently that a fall in GDP would have far less negative effects on banks (through the solidity of banks, which enables them to continue to lend, economic policy responses) than in the past. We will look at the situations of the euro zone and France.