Twenty five euro zone banks, including nine Italian banks, have failed the European Central Bank’s stress tests, and will face a combined capital shortfall of €25 billion.
In an announcement today, the European Central Bank also said that asset values needed to be adjusted by €48 billion following the asset quality review, €37 billion of which did not generate capital shortfall. As a result, the overall impact of the capital shortfall and asset adjustment will be €62 billion, the bank said today.
Among the biggest names to fail the test include Italy’s Banca Monte dei Paschi, the world’s oldest bank, which was found to have a capital hole of €2.1 billion and Belgium’s Dexia, which was found to have a shortfall of €339 million .
Permanent TSB joins nine Italian banks and two Belgian banks who failed the tests which were conducted over the last six months in conjunction with national supervisors.
Slovenia, which engaged in a bank bailout in December 2013, also saw two of its banks fail the test. Despite rumours that no French or German banks would be included in the stress tests, French bank CRH was named as was German co-operative bank MunchenerHYp. Portugal's Banco Comercial Portuges is also facing a capital shortfall as are three Greece banks. Two Cypriot banks, and one Austrian bank also failed to pass the tests.
Speaking in Frankfurt this lunchtime, ECB vice president Vitor Constancio said the results of the stress tests were “credible” and would help to create “a level playing field for supervision in the future.”
While 12 out of the 25 banks had already taken measures in 2014 to deal with their capital shortfalls, 13 banks either have to apply the restructuring or downsizing as agreed by the European Commission, or increase their capital in other ways, he said.
Daniele Nouy, the head of the ECB’s supervisory arm said that the introduction of a standard definition of non-performing loans was “a major step forward in terms of comparability across banks and countries.”
Ms Nouy said the ECB’s supervisory arm would exercise “objective tough, fair and independent supervision” of the banks that are coming under its direct supervision on a day to day basis.
The stress tests comprised of two elements - a point-in-time asset quality review, which examined the adequacy of banks’ asset and collateral valuations, and a forward-looking stress test in which balance sheets were subjected to “stressed scenarios.”
The tests, which have been ongoing since the spring, demanded banks to hold a minimum of 8 per cent Core Tier One assets, and a minimum of 5.5 per cent in a stressed scenario.
But with many of the banks already raising capital in anticipation of the tests, the impact of the stress tests results may be limited when markets open tomorrow. It is expected that any capital shortfalls will be filled from private sources.
The results of the stress tests are published a little over a week before the ECB begins supervising the euro zone's biggest banks, including AIB, Bank of Ireland and Permanent TSB, directly. The move, which will, for the first time, see responsibility for the supervision of banks shift from national regulators to a pan-European regulator in Frankfurt, is the fulcrum of the EU's plan for a "banking union."
The ECB has spent the last year reviewing the leading banks’ assets and subjecting them to rigorous stress tests - an exercise aimed at flushing out any problems before it begins supervising the sector from November 4th.
The ECB’s pass mark was for banks to have high-quality capital of at least 8 percent of their risk-weighted assets in the most likely economic situation for the next three years, and capital of at least 5.5 per cent under a bleaker scenario.
Banks with a capital shortfall will have to say within two weeks how they intend to close the gap. They will then be given up to nine months to do so.
The ECB has staked its reputation on delivering an independent assessment of euro zone banks in an attempt to draw a line under years of financial and economic strife in the bloc.
But there is no certainty that bank lending will now pick up as the ECB hopes, to breathe life into a moribund euro zone economy.
“Thinking that lending somehow can lead GDP is an illusion, and I don’t know how that has somehow crept into the policy debate,” said Erik Nielsen, global chief economist at Unicredit.
Digging down into bank’s balance sheets, the ECB said as of the end of last year, banks’ book values needed to be adjusted by €48 billion and that non-performing loans had increased by €136 billion to €879 billion.
The ECB will not immediately force those lenders with overvalued assets to take remedial action but they will have to hold more capital eventually, leaving less room to expand, lend or pay dividends.
For lending, the more fundamental question is whether the demand for credit is there.
“Businesses need to believe in an increase in the demand for their products before asking for credits, and now that external demand growth is no longer there, this is when the euro zone needs demand stimulus,” Mr Nielsen said.
The ECB is about to take on its new regulatory responsibilities but it may be its monetary policy powers that the euro zone needs most.
Additional reporting by Reuters
