Italian bank raises billions after poor show in stress tests

The test’s “adverse scenario” looks at how banks could cope with four risks over three years: an abrupt rise in bond yields from very low levels in a market where liquidity is thin; poor profitability at banks in a weak economy; rising public and private debt concerns; and stress from a rapidly growing “shadow banking” sector. “There remains work to do which supervisors will undertake in the SREP process”, Enria added. The Italian treasury in a statement said it was satisfied with the deal and that no state money would be necessary to help the bank.

The results came after Italian lender Monte dei Paschi, weighed down by billions of euros in bad loans, put together an 11th-hour rescue package to raise some €5bn to mitigate fallout from the stress test outcome.

The much-anticipated result of the stress tests – for which there was no pass or fail mark – of 51 banks showed that Italy’s third largest bank emerged weakest from the assessment.

Just ahead of the release Monte Paschi announced that it had secured an underwriting agreement for its plan involving the sale of EUR9.2bn in bad loans and a EUR5bn capital increase.

The test’s measure of a bank’s financial health was the common equity tier 1 ratio – that is, the amount of easily accessible capital as a percentage of overall assets.

Like Deutsche, its G-SIB status means analysts will use 7.5 percent as a rough benchmark for its capital level “pass mark”.

BMPS would suffer a 14.23 per cent plunge in its core capital ratio – a key measure of a bank’s financial stability – by 2018 under an economic shock scenario being modelled by the European Banking Authority.

“This stress test is a vital tool to assist supervisors in accelerating the process of fix of banks’ balance sheets, which is so important for restoring lending to households and businesses”.

Spain’s Banco Popular, Bank of Ireland and Austria’s Raiffeisen all ended the test below this level at 6.62%, 6.15%, and 6.12%, respectively.

At the start of the test, the 51 lenders had an aggregate core ratio of 12.6 percent, with all capital requirements factored in.

For the first time, the European Union test included the impact of conduct risks such as fines and settlements on capital during the exercise.

This fell to 9.2% by the end of the test, a drop of 340 basis points, equivalent to €226bn of capital.

EBA said the total hit from conduct costs was €71 billion. The largest impact was from credit or losses on loans, totalling almost 350 billion euros across all the banks tested.