Most analysts were looking for banks to hold above a minimum common equity Tier 1 ratio (CET1) of 5.5%, plus any G-SIB buffer the biggest banks are expected to hold.
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The European stress tests were created to test the ability of banks to withstand tough trading conditions, including an economic downturn. The data reflect full application of Basel III standards.
European banks are fighting to regain confidence as investors doubt their ability to lift profit and capital levels given the region’s dim growth prospects.
According to the Bank of Italy, the Monte dei Paschi di Siena’s Board of Directors has approved a plan to sell its entire portfolio of bad loans and carry out a capital increase of up to 5 billion euros (5.5 billion US dollars).
Monte dei Paschi, Italy’s third largest lender, had been scrambling to pull together a rescue plan and win approval for it from the European Central Bank ahead of the test results.
Markets will also look at how many banks were able to maintain a core ratio of capital to risk-weighted assets of 7 percent.
The second worst performer in the EBA tests – Allied Irish Banks – would see a ratio fall of 8.47%.
Unlike in the two previous rounds of stress tests from the EBA this exercise did not contain a pass/fail threshold whereby weak banks are compelled to increase their capital buffers.
One of the criticisms, before they’ve even released the results, is that one of the key stresses is what would happen under rising-yield scenarios.
Before it’s here, it’s on the Bloomberg Terminal.
There was no pass or fail mark for the EBA tests.
Aggregate numbers suggested that European banks were in a generally healthier position than at the time of the last stress test, in autumn 2014. Italy has joined Greece, Cyprus and Portugal as countries whose banks have worryingly high proportions of non-performing loans.
It is also working on assembling a consortium of banks to back a €5bn capital boost.
The world’s oldest operating bank would be unlikely to cope with a shock to the global economy or strained financial markets, claims the European Banking Authority (EBA). Nonetheless, the EBA’s chair Andrea Enria said the test showed “the benefits of capital strengthening done so far are reflected in the resilience of the European Union banking sector to a severe shock”.
“The EBA stress test results demonstrate our continued progress towards transforming the balance sheet to being safe and sustainable”, said CFO Ewen Stevenson in a statement.
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After days of discussion leading up to a 10-hour meeting on Friday, the BMPS board of directors announced a plan to offload 9.2 billion euros ($10.3 billion) of bad loans, or amounts owed to a creditor that are unlikely to be paid. This time the question of whether banks need to raise more capital is being left to national regulators.
