After Monte dei Paschi, the second biggest casualty in the EBA stress scenario is Allied Irish banks, with the Irish lender’s capital hammered down from 13.11 per cent to 4.31 per cent.
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“We come out of the 2016 stress test stronger than in 2014, although this year’s exercise was more demanding”, Chief Executive John Cryan said in a statement, adding that the bank would focus on further strengthening its capital. The Italian lender’s capital ratio was the only one to turn negative in the adverse scenario, at -2.4%, meaning, in plain English, that it would be bankrupt.
The announcement came shortly after the bank’s board announced a plan for shifting the bad loans that have weighed down on the lender, which was founded in 1472. “Whilst we acknowledge the extensive capital raising done so far, this is not a tidy costs of health”, EBA Chairman Andrea Enria stated in a declaration. None of the four United Kingdom banks – Lloyds and HSBC were also tested – dropped below the legal minimum of 4.5 per cent capital ratios. There were some surprises, for example two major Irish lenders and Barclays doing less well than expected, while German duo Deutsche Bank and Commerzbank fared better than anticipated.
Under the European Banking Authority’s economic shock scenario, BMPS would suffer a 14.23 percent plunge in its core capital ratio – a measure of stability – by 2018. At the start of the test, the banks had an aggregate core ratio of 12.6 percent, with all capital requirements factored in. RBS’s modelled leverage ratio under the adverse scenario was 3.6% on a fully loaded Basel 3 basis and 4.2% under the PRA transitional definition for leverage ratio as at 31 December 2018.
The money injection from private sources avoids a potentially painful European Union rescue that would have imposed losses on creditors like bondholders. Of the banks tested, 37 are based in the euro zone and monitored by the ECB, which stated the results showed development in fixing balance sheets.
Investors, however, saw the test result in a quite different way and reacted negatively with the Stoxx Europe 600 Index decreasing and shares of banks dropping on Monday. That means RBS may be required to raise more money to reassure regulators. The issue now is how to clear a mound of bad loans festering on bank balance sheets.
No banks from Cyprus, Greece or Portugal were big enough to fall within the scope of the test, which looked at four main risks: a rise in bond yields; rising public and private sector debt; weak profits at banks; and stresses from outside the banking sector. For banks such as these, the stress tests may not force action in the way that have with Monte dei Paschi, but they also offer little in the way of relief.
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The Department of Finance said the stress test result would not be an obstacle to the state’s plans to sell its stake in the bank, saying they did not paint a full or accurate picture of the bank’s situation.
