Banks have held back the FTSE 100 after the results of stress tests from the European Banking Authority (EBA) which showed that Royal Bank of Scotland and Barclays would perform poorly in a crisis. AIB only fared better than Italy’s Monte dei Paschi, with a core equity capital ratio of 4.31 percent under the adverse scenario. The 2016 Stress Test confirms stronger capitalisation across the sector, yet Price-to-Book ratios are at nearly unprecedented lows. The impact on the aggregate CET1 capital ratio in the adverse scenario for the 37 SSM banks only (that account for approximately 70% of total REA in the sample) is ‐390bps on a transitional and ‐330bps on a fully loaded basis.
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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.
Fixing the banks is crucial for Italy and the wider eurozone because financially weak banks are more reluctant to lend out money to households and businesses, stifling the potential for economic growth needed to create jobs.
Compared to five years ago, the ratio of highest-quality capital of European banks is now more than twice, ” said EBF Chief Executive Wim Mijs.
Even before the results of European bank stress tests are announced tonight, Jim Reid thinks regulators might have missed something.
All but two of the banks – the struggling Italy-based Banca Monte dei Paschi di Siena and Allied Irish Banks – retained the minimum capital level required for the the tests.
Monte Paschi sought to get ahead of the poor result with the announcement of a 5 billion euro ($5.6 billion) capital increase, its third in two years.
“That the politicians probably need to support or to perhaps push the Irish banks to continue to work through these problems of loans in arrears”.
The broadly encouraging aggregate results were overshadowed by the dismal performance of a few banks.
But the damage in the stress test goes beyond Italy, which has been the focal point for investor anxieties about Europe’s banking system.
Under the scenario set out by the stress test, RBS saw its common equity Tier 1 ratio drop from 15.5 percent to roughly eight percent, the third worst drop among banks tested.
The EBA’s results show another major Italian bank, Unicredit, seeing its capital buffer fall from 10.38 per cent to 7.1 per cent in the stress scenario.
“(These) stress tests are perhaps a realisation that there are still some issues to be dealt with, in particular the large stock of non-performing and defaulted loans that the banks are carrying”.
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Unlike in previous years there was no pass or fail to the test. Most significantly, this year’s tests only examined 51 banks from 14 European Union member states and Norway, instead of the 123 banks from 22 countries scrutinised in 2014; so no banks from the still-struggling economies of Greece, Portugal or Cyprus were included, undoubtedly flattering the results.
