On the eve of the stress test, Monte dei Paschi’s board confirmed that it had rival proposals to save the world’s oldest bank.
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Acting as a central data hub for the entire European Union, the EBA is publishing both aggregate results of the EU-wide exercise and granular data for each bank, including detailed information at both the starting and end point of the exercise, under the baseline and the adverse scenarios.
Unlike in previous years, the EBA did not judge whether banks had passed or failed its latest tests. Differences in capital positions between two banks could be superficial; what matters more is to understand the full regulatory capital requirement for each bank, and its capacity and flexibility to take actions to respond to the shock.
The European banking index fell 3.4 percent, making it the worst-performing sector and taking this year’s total losses to more than 30 percent.
Peers Tesco and Sainsbury were also down 1.1 percent and 1 percent respectively.
“European banks are hampered by their profitability in various areas and by the low-interest-rate environment”.
Italy’s Banca Monte dei Paschi di Siena SpA was at the bottom of the pack, the only lender to have its capital wiped out in the exam, as it struggles against the backdrop of an Italian banking crisis. “It is the most penalised bank, while one of the best banks is Intesa”, said Guido Gennaccari, a financial analyst with Trading Room Roma.
The ECB has in recent months been reducing its so-called deposit rate further below zero in the hope that banks opt to lend money rather than place it at the ECB. That rate is now minus 0.4 percent and many economists think it could be cut further in coming months as the European Central Bank tries to encourage lending. Throughout Europe’s debt crisis, it was clear that problems in one country can easily spill over to another.
Italian banks are estimated to hold 360 billion euros ($400 billion) in soured loans that will have to be partly written off. With Italy ranking as the third-largest eurozone economy, any crisis of confidence over the state’s financial health has the potential to rekindle concerns about the overall currency’s integrity.
Policymakers and investors had been on alert for a poor performance by the Italian bank.
Renzi has staked his future on winning a referendum on political reform in the fall. A slump in share prices across the sector since last Friday’s publication of the tests results suggests many investors are not convinced.
Examples of possible measures aimed at strengthening a bank’s balance sheet would be selling off discounted portfolios of distressed debt, reducing over-exposure to types of loans deemed high-risk such as mortgage lending in overpriced regional markets, raising fresh money from investors to increase capital buffers against possible future losses, or reducing dividend payouts to investors and retaining a higher proportion of earnings for that same goal. The issue will be underwritten by a consortium of global banks including JP Morgan, Bank of America, Citigroup, Credit Suisse, Deutsche Bank and Goldman Sachs.
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