In short, the resilience of the banks.
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In the European tests, 51 banks representing 70% of the banking sector will be covered.
The EU said that its autumn 2015 forecast provides the baseline macro scenario through 2017 for most variables and the 2018 baseline was derived for the objective of this exercise and isn’t part of the official forecast.
“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”.
Banks will be tested under two scenarios; baseline and adverse, in line with the 2011/2014 bank stress tests. The tables available on the EBA’s website present the results of OP Financial Group and other banks. The pressure has forced major strategic and structural changes at Italy’s biggest bank, UniCredit, where the new CEO Jean Pierre Mustier has moved quickly to sell assets and reshuffle the organizational structure. Two key sources are the money put in by shareholders and profits the bank makes and does not hand out to the shareholders as dividends (known as retained profits).
Under the stress scenario, Monte dei Paschi’s fell to minus 2 percent.
If that process goes too far, however, the capital can be wiped out and if the bank can’t pay its debts then it’s insolvent – bust.
The bank is also working on assembling a consortium of banks to back a €5bn capital boost – a deal which Italy’s finance minister, Pier Carlo Padoan said the government was “greatly satisfied” with. He writes, “In effect, in a worst-case scenario, any attempt at a write-off of this magnitude could cause a termination of all non-central bank funding of the entire Italian banking system and it would cease to function”. He insisted the company’s balance sheet was “absolutely rock solid” and added: “The market also expressed some concern about the adequacy of our legal provisions but I don’t share that concern”.
One of the goals was to uncover remaining vulnerabilities in order to be able to address them. With no set, pass or fail criteria, the EBA left it up to investors and regulators to interpret the results.
But the sector on average would remain above European Union legal minimum levels in case of the shock being tested – an European Union economic contraction of 1.2 per cent in 2016 and 1.3 per cent in 2017 followed by 0.7 per cent growth in 2018.
All of them end up almost 7% smaller than they would have been in the baseline scenario. The level of risk of that happening is often reflected in the rate of interest with high-risk creditors paying more. Their results are challenged by the supervisors. 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.
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According to the European Banking Authority, the hypothetical stress scenario translated into a detrimental impact of 380 bps (3.8 percentage points) on the CET1 ratio.
