The Italian lender was a conspicuous underperformer in a largely positive set of EBA stress tests, which are advisory only in nature and will feed into the European Central Bank’s own tests and capital recommendations later this year.
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Most of the banks tested, 37 out of 51, are based in the euro zone and supervised by the ECB, which said the EBA’s stress test results reflected progress in repairing balance sheets: “The banking sector today is more resilient and can much better absorb economic shocks than two years ago”, said Daniele Nouy, who heads supervision at the ECB.
Commerzbank’s core equity Tier 1 ratio (CET1) was 7.4 percent in this adverse scenario, the data showed.
“If Friday’s bank stress test results show that Italy’s banks in particular require some form of intervention, then we could possibly see the [British pound/euro] rate rally into the EUR1.20-EUR1.22 trading range”, said Nawaz Ali, currency strategists at Western Union in a note.
A bank that comes out of a stress test really badly could ultimately have to be bailed out or bailed in – this latter is a process in which creditors have to take losses to keep the bank afloat.
In the baseline scenario of the test under which the operating environment mainly remains unchanged, OP Financial Group’s CET1 ratio will improve further and be 21.2% in 2018.
Founded in 1472, Monte dei Paschi is one of the world’s oldest banks, but in recent years has been one of Europe’s weakest, with €50bn of bad loans.
Concern over Europe’s banks has grown since the UK’s vote to leave the European Union and has increased market jitters.
The EBA is now based in London but is likely to move after the vote for the country to leave the EU.
And it is just these risks that stress tests are created to invoke.
The ECB will use the outcome of the stress test as one of several elements in determining its guidance to individual banks under what is known as its Pillar 2 Guidance.
Also, saving banks has in the past overwhelmed some eurozone states’ public finances, such as Ireland in 2010.
Monte dei Paschi is close to finalizing a consortium of eight banks to guarantee a 5 billion euro ($5.55 billion) cash call the lender plans to carry out to strengthen its balance sheet, a source close to the matter said. This time the question of whether banks need to raise more capital is being left to national regulators.
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.
Deutsche Bank has so far ruled out another cap hike and expects that it can add up to 7 billion euros (S$10.5 billion) to its capital buffers by the end of 2019 to comply with bank rules.
The EBA test places restrictions on banks’ flexibility to assume they take actions to cut costs and boost income in the stress scenario.
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Investors are braced for another bout of turbulence on global markets ahead of the release of special reports on the financial health of Italy’s ailing banking sector.
