In the long run, for the ECB it is a test of transparency and trust in the banking sector which will help the disbursement of credit to the economy. In short, the overall analysis (asset quality review e stress test) conducted by the Eurotower in the last ten months translates into a race to present the return plans for those who have failed the exam. There are two weeks to reveal the countermoves. And from 6 months to 9 months to implement them (depending on how the capital shortage was generated).
In Italy there are 9 banks involved in this procedure. However, already five have implemented additional recapitalization measures in 2014 (stress test results are based on end-2013 data). Of the remaining four, two, Bpm and Popolare Vicenza, survived by the skin of their teeth according to the supplementary data also provided today by Bank of Italy. Mps and Carige thus ended up in the spotlight.
Lightning-fast was the reaction of Banca Carige which, knowing the bad repairs, issued a press release half an hour after the announcements from the ECB and Bank of Italy on the results in which it announced the approval by the Board of Directors of a repayment plan which envisages the coverage of the shortfall through a capital increase for an amount of no less than 500 million guaranteed by Mediobanca and other asset sale transactions.
Furthermore, Piazzetta Cuccia has already given its commitment to pre-guarantee up to 650 million for the full subscription of the capital increase, should the greater amount be deemed necessary for the purpose of validating the measures of the capital plan by the ECB.
M&A IN SIENA?
For Mps it is instead a question of thinking about how to scrape together 2,1 billion euros. However, the ECB's analysis did not consider the assumptions envisaged in the restructuring plan that the bank submitted to the European Commission in November 2013 (and which was approved). Bank of Italy points out that the 2,111 billion additional requirement would be reduced to around 1,35 billion if we do not take into account the commitment to repay the 'Monti bonds' within the time horizon of the stress tests.
And it opens up to aggregation scenarios. Any merger operation involving Mps would find the Bank of Italy "extremely happy, if it were an operation capable of relaunching the supply of credit to the real economy and strengthening the bank's solidity", commented Fabio Panetta, Deputy General Manager of Bank of Italy, in the press conference following that of the ECB.
The word will now pass to the market. The Treasury for its part "confides that the residual capital shortfalls" of the Italian banks in the ECB stress test "will be covered with further market operations, and that the transparency ensured by the Comprehensive Assessment will allow them to be completed easily". However, the Treasury recalled in the note that according to the Ecofin declaration of November 2013, capital shortfalls should primarily be covered through private sources.
If this is not sufficient or in the event of inability to access market funding, other appropriate measures will be taken, if necessary, to recapitalize the banks, including, where necessary, resolution measures and/or public financial support. The size of the new resources, 2,9 billion missing (Mps + Carige), is such that it shouldn't require any public aid. The shortage of assets "does not require any injection of public finances", wanted to reassure Panetta.
BPM AND VICENZA ARE SAVED IN EXTREMIS
Bmp and Vicenza, on the other hand, saved themselves by the skin of their teeth. If in the ECB's analysis (which takes into consideration only the capital increases and the conversion of convertible bonds as at 30 September 2014) the two banks are among the institutions that have yet to increase their capital respectively by 166 million and 223, Bankitalia found that thanks to other capital measures decided during the year (including extraordinary disposals of assets, completion of procedures for authorizing the use of internal models launched some time ago) these two banks too can sleep peacefully. Not only. In the note, Bankitalia wanted to underline that the needs of MPS and Carige derive exclusively from the results of the adverse scenario of the ECB exams, that for no bank shortcomings were highlighted with only the asset quality review and that overall the banking system reports capital surpluses for 25,5 billion.
“The results – commented Bankitalia – confirm the overall solidity of the Italian banking system, despite the repeated shocks suffered by the Italian economy in the last six years: the global financial crisis, the sovereign debt crisis, the double recession”.
SINCE MID-2013 203 BILLION OF NEW CAPITAL IN EUROPE
The ECB's analysis of the 130 largest European banks was in fact structured around two main tests: on the one hand, the quality review (Aqr) axis determined whether banks value assets correctly in their balance sheets; on the other hand, the stress tests simulated the capital that the banks would need in the event of a worsening of the economy, according to a double scenario (one baseline and one particularly challenging and adverse). The combined result of these two main tests led to the identification of a capital shortfall totaling 25 billion for 25 banks and 48 billion in asset valuation adjustments.
Of these 48 billion, however, 37 did not give rise to a capital shortfall (which means that the overall impact on banks is 62 billion: 25 plus 37). However, of the 25 banks identified, 12 have already implemented recapitalization actions in 2014 for 15 billion euro. And since mid-2013, therefore before the closure of the balance sheets on which the ECB was satisfied, European banks have put 203 billion euros of new equity in the pipeline to prepare for the stress tests, noted the vice president of the ECB, Vitor Constancio ,
HOW ADVERSE IS THE ADVERSE SCENARIO?
The AQR then restated the overall exposure to non-performing loans at 879 billion from the initial 136 billion while the stress test in the event of an adverse scenario indicated that the capitalization of banks would decrease by 263 billion, reducing the Cet1 by four percentage points , to 8,3% from 12,4%.
But how adverse is the adverse scenario? The question many asked themselves after the first stress tests of the EBA a few years ago gave a too rosy picture of the banking sector for many. Bank of Italy, in the note and in the press conference, specified that the adverse scenario of the stress tests was specifically constructed in order to give a real test of the banks' resistance to extreme situations: in the Italian case, the scenario is very unfavorable because it assumes a severe recession for the entire 2014-16 period, after the one already suffered by the Italian economy in 2012-13, which followed that of 2008-09; it also hypothesizes a worsening of the sovereign debt crisis with an impact of 3,5 billion from public debt.
This hypothetical scenario used in the simulation would therefore configure a collapse of the Italian economy, with serious consequences far beyond the banking sphere. “A scenario – specified the deputy general manager Panetta – worse than that of other countries because it assumes an unfavorable scenario especially in terms of growth. And here the initial conditions count for a lot”.
