ITALY’S central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector.
Officials at the Bank of Italy criticised parameters in regulatory stress tests as unrealistically harsh on Italian banks and disputed the exact number of failures, after nine Italian banks fell short in a comprehensive review unveiled by the European Central Bank.
Across the euro area, some 25 banks emerged with capital shortfalls following an unprecedented regulatory effort aimed at dispelling the cloud of uncertainty surrounding the European banking sector’s health.
The announcement represents the culmination of more than a year of intensive work costing hundreds of millions of euros and involving thousands of officials and accountants – all aimed at restoring investor faith in European banks ahead of the launch of a unified banking supervisor in Frankfurt.
The biggest failure was Banca Monte dei Paschi di Siena, which has already hired bankers at Citigroup and UBS to advise on its options after it received takeover approaches.
German banks emerged largely unscathed, with only one technical failure, while Spain clawed its way through with no shortfalls.
The total shortfall of the 25 banks before capital raised during 2014 was €24.6bn using adverse economic scenarios. However, many of those failures were technical ones, because banks have raised money from investors after the December 2013 cut-off date.
The process has involved an Asset Quality Review – a deep dive into euro area banks’ books – as well as stress tests gauging banks’ ability to withstand a dramatic worsening in economic conditions including rising unemployment and tumbling house prices.
It has triggered capital raisings and asset sales by banks attempting to get ahead of the regulatory process, with €56bn of capital raised between January and September.
Investors expressed optimism that the announcement could prove a turning point. “I think the market will react quite positively to this as it has been an overhang for quite some time,” Philippe Bodereau, global head of financial research at Pimco. “Some of the weakest banks are moving from the hospital to rehab.”
Davide Serra, founder of hedge fund Algebris, said: “We now know that we can have a 5 per cent contraction in the eurozone economy and the banks will still have more than 8 per cent capital – that is very positive for the sector.”
After capital raisings in 2014 were factored in, there were 13 banks that needed to do more to strengthen their finances, four of which were Italian.
Apart from Banca Monte dei Paschi (MPS), which had a €2.1bn shortfall net of capital raised this year, the Italian failures on a net basis were Banca Carige, Banca Popolare di Milano and Banca Popolare di Vicenza.
Bank of Italy officials sought to minimise the blow to MPS, saying that if repayments of state aid related to the restructuring plan brokered by the EU were not included in the exercise, MPS’s shortfall would have been smaller, at €1.35bn.
Italian officials also said their banks did not benefit from nearly as much government assistance as others during the crisis, which also affected the outcome.
Fabio Panetta, vice-director general of the Bank of Italy, claimed the result of the investigation was “reassuring and not surprising” as he insisted it was highly implausible that the country’s economy would see the five-year recession included in the adverse scenario in ECB stress tests.
Outside Italy, institutions including Banco Comercial Português, Volksbanken of Austria, and Permanent TSB of Ireland failed net of any actions taken in 2014.
Belgium’s central bank also questioned the ECB’s conclusions on Sunday, saying that it did not think either of the two Belgian banks that failed the stress tests – Dexia and Axa Bank Europe – needed to raise more capital.
The banks were privately notified of their results on Thursday. They will have two weeks to come up with plans to tackle any capital shortfalls and up to nine months to execute them.
Alongside the ECB, the European Banking Authority released results of a complementary set of stress tests covering the whole of the EU that found 24 banks had failed the tests on its criteria – only Spain’s Liberbank was missing from the ECB list of the same failed banks. The EBA said 14 banks still needed to raise capital, including the Belgian banking subsidiary of French insurer Axa, which the ECB excluded.
The euro area health check covers 130 lenders in the single currency region. The scope of the EBA exercise is different – covering 123 banking groups across the EU. FT