This evening, with the markets closed, the European Banking Authority (EBA) will publish the results of the stress tests conducted on 53 banks, which represent 70% of the European financial system. Finally we will find out how the banks of the Old Continent are doing and how they would fare in the event of economic and financial stress. In Italy the spotlights are on Mps, which risks being rejected, but for which a restructuring plan seems ready.
WHAT ARE STRESS TESTS?
Stress tests are tests with which the EBA tries to put bank balance sheets under pressure to assess their capital solidity even in conditions of economic and financial stress. Therefore, assuming two different scenarios in terms of growth, inflation, interest rate rise and stock index decline, the EBA tests the resistance of banks with respect to the main risks (credit, market and counterparty, operational and systemic).
HOW IS THE CAPITAL SOLIDITY OF BANKS SUMMARIZED?
The reference indicator is the so-called Common Equity Tier, or CET 1, which measures the ratio between the bank's available capital and its risk-weighted assets. According to the EBA, the higher this ratio is, the more secure a bank is (theoretically).
In the 2014 stress tests, the ECB imposed two minimum capitalization thresholds on banks:
– 8% in the favorable scenario
– 5,5% in the unfavorable scenario
This time, the EBA has not imposed any minimum reference threshold, so banks will not be asked (formally) to return the missing capital. However, the results of the stress tests will be used as an analysis and evaluation tool during the SREP ("Supervisory Review and Evaluation Process"), i.e. they will contribute to defining the capital indications within a broader supervisory review and evaluation process , which should end towards the end of September.
THE MPS NODE
According to reports from the Financial Times, Credit Suisse analysts have estimated that around 20% of European banks will have a Cet 1 below the 5,5% threshold set for the unfavorable scenario during the 2014 stress tests; among the most important institutes there could also be Deutsche Bank and Commerzbank.
Among the Italian banks the only one that should fail to pass the exam is Monte dei Paschi di Siena. However, a definitive restructuring plan appears to be on its way: the Bank should be able to recapitalize itself for around 5 billion euro and reduce itself by 10 billion in net non-performing loans, without resorting to public aid and safeguarding savers who hold subordinated bonds.
LIMITED IMPACT
The stress tests will once again expose the weaknesses of some banks, but they will not change the substance. As ECB President Mario Draghi reiterated during the last press conference, overall European banks are well capitalized, but they need to work on the profitability front.
So the stress tests are a useful and positive exercise in transparency which, however, does not solve the profitability problem of the sector, which with zero rates does not have much room for manoeuvre. For the moment, in terms of investment, we continue to stay away from European banks: although valuations are becoming increasingly attractive, the risks are still very significant.
Source: AdviseOnly
