The stress test was carried out by the European Banking Authority and simulated how 51 of the EU’s biggest institutions would fare if the EU economy fared 7.1 percent worse than expected through 2018.
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However, the EU official said European institutions are ensuring the systems they have set up to co-ordinate the winding-down of a bank are in place for Monte dei Paschi, should they be needed.
Monte dei Paschi, UniCredit, Deutsche Bank, Morgan Stanley and Citi declined to comment.
Indeed, state bailouts may buy more time but not necessarily boost investors’ confidence in the banks at a time when the European banking union is still not fully operational. “More banks need to come onboard”.
Spain’s Banco Popular, Bank of Ireland and Austria’s Raiffeisen all ended the test below this level at 6.62%, 6.15%, and 6.12%, respectively. The largest impact was from credit or losses on loans, totaling almost €350bn across all the banks tested.
“Overall supervisory capital expectations will remain broadly stable compared to 2015”, it said.
But valuations of European banks still lag their rivals in the United States, where regulators are seen as having taken a tougher approach to cleaning up balance sheets, and some EU countries have more work than others to do.
AIB moved on Friday night to calm concerns by stressing the results of its “transitional” CET1 ratios from the EBA’s tests, which were 15.9 per cent for past year and 7.4 per cent for 2018.
Responding to the tests the Bank of England said in a statement: “The results for the four banks are consistent with those of previous Bank of England stress tests”.
The release of the ECB bank stress tests on Friday will likely attract considerable attention.
In 2014, the banks had to show a minimum 5.5-percent core capital ratio – a measure of financial strength – in the worst-case scenario.
“A precautionary capital increase (for Monte dei Paschi) funded by the government is only a contingency plan …” But global markets tend to prefer banks to retain a ration of seven per cent – the typical level for triggering the writedown of bonds issued by banks to replenish capital.
Each bank was then graded by what its predicted core equity capital ratio – the difference between a bank’s assets and its investments including debts – would be in those circumstances.
The EU’s first two tests plugged capital holes exposed in the financial crisis, a job now largely done, with the focus pf this year’s test, the bloc’s third, on spotting vulnerabilities in business models.
The value of the new shares is equivalent to five times the bank’s current market capitalization.
But the sector on average would remain above European Union legal minimum levels in case of the shock being tested – an European Union economic contraction of 1.2 per cent in 2016 and 1.3 per cent in 2017 followed by 0.7 per cent growth in 2018.
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The tests, however, do not gauge the impact of negative interest rates which are now emerging as a threat to already strained banking profitability.
