Italy's Monte dei Paschi, Royal Bank of Scotland (RBS) and AIB emerged as the biggest losers in the EU's banking stress tests, which largely found that the region's top 51 banks had enough capital to withstand another financial crisis.
While the tests abandoned their previous pass or fail marks, Italy’s embattled Monte dei Paschi was the clear failure – its key capital ratio turned negative by the end of the three-year adverse scenario of the test, indicating the bank would be insolvent.
Immediately before the results were published, the bank said it would raise €5 billion of capital and offload €9.2 billion of bad loans. Earlier yesterday, it rejected a rescue proposal from Corrado Passera, the veteran Italian executive and former minister, in partnership with Swiss bank UBS.
As well as the worst end-point capital position, Monte dei Paschi had the biggest deterioration in its key capital ratio – known as its fully loaded common equity tier one (CET1) ratio, which takes into account new regulations due to come in soon.
That ratio fell 14.51 percentage points for the stricken Italian bank – more than four times the average 340 basis-points deterioration – leaving it with a ratio of -2.44 per cent. The ratio across the sector was 9.2 per cent.
Headline
AIB had the second biggest fall in its fully loaded CET1 ratio, losing 880 basis points to leave it at just 4.31 per cent. That makes the Irish government’s hopes of reprivatising the bank over the coming years more distant because the headline figure is likely to spook investors, even though it penalises the banks under some rules that will not come into effect until 2022.
On a country-by-country basis, Ireland's two tested banks – AIB and Bank of Ireland – averaged the lowest CET1 ratio on a fully loaded basis, with an average of 5.21 per cent. On a transitional basis, the Irish banks have a fully loaded ratio of 7.54 per cent, the second weakest in the group, after Austria's 7.32 per cent.
The UK government also faces questions as RBS had the third biggest fall in CET1 ratio, losing 745 basis points to leave it at 8.08 per cent, still the 13th best in the group. Barclays also emerged in a relatively weak position with a fully loaded CET1 ratio that fell from 11.4 per cent to 7.3 per cent in the adverse scenario.
The overall results were less dramatic than those of the ECB’s inaugural analysis in 2014, which revalued the balance sheets of almost 130 banks and ordered the sector to raise €25 billion. Those tests were widely discredited by the market as not harsh enough. The latest tests, while less closely watched, are expected to face similar criticism.
Brexit
“Whilst we recognise the extensive capital raising done so far, this is not a clean bill of health,” Andrea Enria, chairman of the
European Banking Authority
said. “There remains work to do, which supervisors will undertake in the SREP [regulatory engagement] process.”
Europe’s banks have raised €180 billion since the end of 2013. Several issued statements stressing that even though the tests were tougher, their results were better than in 2014.
The latest tests have already come under fire for not capturing shocks such as the UK’s unexpected decision to leave the EU, and negative interest rates. While they do include market shocks that are more severe than those seen in the immediate aftermath of the Brexit vote, the scenario does not capture the outsize risk for certain banks.
The adverse scenario included falls in real EU gross domestic product of 1.2 per cent in 2016, 1.3 per cent in 2017 and 0.7 per cent in 2018 – a progression that is 7.1 per cent worse than the expected ‘baseline’ scenario. The stress tests also do not include the likely impact of some regulations that have not yet been finalised, known as ‘Basel IV’. – Copyright The Financial Times Limited 2016.
