European Bank Stress Test: Preview

The results of the latest stress tests on European banks are expected to be released at 10:00 am CET (5:00 am ET). The tests cover a little more than 50 of Europe’s largest banks, with around 80% domiciled in the eurozone.  

The banks will be tested under two scenarios. The first scenario is EC’s economic forecasts made last year.That is the baseline.The second is a stress scenario developed by the European Banking Authority (EBA) and the European Systemic Risk Board.This scenario includes shocks in numerous markets.  

Indications from officials indicate there will not be a pass/fail test.The key is whether capital levels remain sufficiently robust.If not, the bank will receive “guidance” from the ECB. Simply because a bank is found in need of capital, it does not mean that it must address the need immediately or be immediately subject to resolution procedures. 

The focus has been on Italian banks.  A local paper reported today that of the five Italian banks that were tested, only one would require more capital.It is not surprising that it is Banco Monte Dei Paschi di Siena that needs capital.The report indicated that Intesa, Bano Popolare, and Ubi Banca are the upper end of the EBA’s capital range, while Unicredit was in the middle to the high part of the range.Monte Paschi, in contrast, is classified as a higher risk.  

Italy is not the only country engaged in negotiations with EU officials over state aid for banks, so is Portugal.  Its banks are perceived to be undercapitalized and saddled with bad loans (estimated ~30 bln euros). Estimates of the amount of capital needed by Portuguese banks is up to around eight bln. 

Between three and four bln euros may be needed just to compensate for the bank-financed resolution fund that bailed out Portugal’s Novo Banco (2014). The government is trying to facilitate a sale of the bank, but last September rejected all three shortlisted bids.An announcement about another attempt is expected next month, though the EU has extended the official deadline until August 2107. Portugal is also in talks with the EU over recapitalizing state-owned Caixa Geral de Depositos, the country’s largest bank.  Reports show a wide range of estimates of its capital needs–2 to 5 bln euros.