Italian banking official: Stress test restores credibility

“Investors will want to see these big banks manage to hike their capital ratios to a point where after an adverse test they’re closer to 10pc level”, said Julien Jarmoszko at S&P Global Intelligence. For example, the Lloyds Bank had its CET1 ratio drop from 13% to 10.1% between the 2015 end of year test and the latest EBA test.

Alongside RBS, the process involving 51 European institutions raised concerns about the performance of Barclays after the EBA found that its capital ratio (CET1) would fall from 11.4% to 7.3% under the stress tests. For most of the year the bank shares have been among the worst performers after the introduction of negative rates undermined their profitability. It announced a package of measures to shore up its financial position, a move it will hope prevents a meltdown in the Italian banking sector, which could send shock waves through the markets.

In 2014, the EBA tested 124 banks for their ability to withstand economic and market shocks.

We welcome today’s publication of the results of the European Banking Authority (EBA) 2016 stress test.

It is hard to paint a glossy picture when considering the fact that 25 banks failed the stress test out of the 51 tested.

Plus the report’s authors also point out that the 34 listed banks in the latest stress tests results have lost on average 33 per cent of their book value since the last stress tests were done less than two years ago. Lack of capital still hinders many banks and this has undermined the stimulus efforts that have so far been carried out by the European Central Bank.

In a statement AIB said it was “well capitalised” and was “generating capital” again. German retailer Metro slumped 8.7 percent after reporting an unexpected loss for its fiscal third quarter, caused largely by restructuring costs at its wholesale business in Germany.

Barclays said the stress tests result did not take account of these sell-offs.

“Europe’s problem is simple – too much debt on bank balance sheets at too low a margin”, Berenberg analysts said in a note.

He said: “We are confident that in delivering our strategy, we will transform RBS into a low risk, resilient bank”.

Among the other United Kingdom banks, HSBC’s (HSBA) capital fell to 8.7% and Lloyds Banking Group (LLOY) stood at just above 10%. For some banks, results varied based on whether current “transitional” capital requirements were used, or the “fully-loaded” requirements of when the Basel III capital rules enter into force in 2019.

“It is the most penalised bank, while one of the best banks is Intesa”, said Guido Gennaccari, a financial analyst with Trading Room Roma.

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

As a result, the banks could just continue to stumble on, further hobbling an economy that’s barely grown in years. More significantly, its leverage ratio came in a 2.9%, below the 3% level regulators typically require. “This complexity may add difficultly in initially understanding the results”.