Monte dei Paschi, Italy’s third biggest lender, had actually been scrambling to gather a rescue strategy and win approval for it from the European Reserve bank ahead of the test results. “Part of the 6 billion will not be investment grade and it will be hard to place”, said LC Macro Chief Economist Lorenzo Codogno, a former chief economist at the Italian treasury. This includes reducing costs and boosting fee income and waiting for mortgages tracking the European Central Bank’s (ECB) record low interest rate that are no longer sold to expire.
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He said that even though RBS would be hit harder than other banks, it still emerged with a core tier one ration comfortably above the level the EBA had previously set as its hurdle.
“The group expects to maintain sufficient capital to meet, at a minimum, applicable regulatory capital requirements plus a management buffer”, the bank said. Despite the bank holiday, the Irish Stock Exchange was open for trading.
“The uneven results of the five Italian banks included in the EBA’s sample highlight bank-specific weaknesses against a backdrop of challenging operating conditions”, analysts at Moody’s said in a note on Monday.
Bank of Ireland and AIB both dismissed the tests as a snapshot in time, as it reflected the position at the end of a year ago.
It’s “certainly positive for subordinated debt holders”, who might have had to share losses in a government bailout, said Jacopo Ceccatelli, chief executive officer of Marzotto SIM SpA, a Milan-based broker-dealer. The nation’s treasury said Friday that there was no need for such an intervention, although it had discussed potential options with the European Commission that would be compatible with state-aid rules.
The Royal Bank of Scotland has suffered the biggest blow to its financial strength of any United Kingdom bank in Europe-wide checks. The EBA concluded that thanks to significant efforts to raise capital in recent years, the European Union banking system was resilient as a whole, though it noted that the individual performance of banks varied significantly. “While the execution risk for the restructuring deal remains, we view the plan as a positive development for the sub-sector”.
Such worries also put the Italian lenders in the spotlight during the European Banking Authority’s stress tests, which showed very different outcomes for the country’s banks. This is more than 200bps above the starting point for the 2014 and more than 400bps over average capital level in 2011. Sources close to the deal said the process could take a year as a due diligence of the underlying loans needs to be completed for rating agencies to gauge their worthiness against an uncertain economic backdrop for Europe post-Brexit. None of the assessed financial institutions “failed” (there is no pass fail threshold), unlike in the previous tests.
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-With assistance from Birgit Jennen Francesca Cinelli and Steve Geimann.
