RBS Group performed poorly in the latest European stress tests, which assess how the banks might perform in adverse economic conditions. Those firms could face extra scrutiny from regulators or investors, analysts at Barclays Plc wrote in a note to clients before the publication.
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The stress test was carried out by the European Banking Authority and simulated how 51 of the EU’s biggest institutions would fare if the EU economy fared 7.1 percent worse than expected through 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. But the bank’s board on Friday approved a plan to unload some of its nonperforming loans (http://www.marketwatch.com/story/monte-dei-paschi-board-approves-bad-loan-plan-2016-07-29) and raise fresh capital, moves aimed at fending off a government bailout. Royal Bank of Scotland dropped 1.75%, while Banco Santander (SAN) fell 1.9%.
Italy’s fraught banking sector produced the worst results, with the beleaguered Monet dei Paschi di Siena shown to have all its capital buffers wiped out in the three-year stress scenario.
Shares in Monte dei Paschi rose around 4 percent on Monday, while those in Italy’s biggest bank by assets UniCredit shed almost 8 percent and the overall Italian banking index fell just over 3 percent.
United Kingdom banks suffered some of the greatest shocks in the stress test’s crisis scenario.
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Most of the banks tested, 37 out of 51, are based in the euro zone and supervised by the European Central Bank.
The money injection from private sources avoids a potentially painful bailout for the Italian bank that under European Union rules would have imposed losses on creditors like bondholders, many of which are small savers in Italy.
The 2016 stress test does not contain a pass/fail threshold and instead is created to be used as a crucial piece of information for the supervisory review process in 2016.
You can see a full summary of the European Banking Authority’s findings here.
When smaller banks not subjected to EBA’s stress test are also included, it has been estimated that Italy’s banks are struggling under the combined burden of some 360 billion euros ($400 billion) in soured loans. This is a measurement of a bank’s core equity capital compared to its total risk weighted assets.
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 an adverse economic scenario this would fall to 9.4 percent by the end of 2018.
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“There is some crumb of comfort in terms of the results and a potential plan for one particular bank but there is a broader issue at play here that needs to addressed. and will take time”, Credit Agricole strategist Orlando Green said.
