ECB Says Most Banks Are Healthy
Regulators Identify 13 Banks That Still Need to Come Up With Extra Capital
Shares in the Italian bank Banca Monte dei Paschi di Siena tumbled 15% on Monday morning after it emerged as one of the most troubled banks following the European Central Bank's stress tests. Photo: EPA
Hoping to quell years of anxiety about Europe’s financial health, regulators said Sunday that all but 13 of the continent’s leading banks have enough capital to ride out another economic storm.
The European Central Bank and the European Banking Authority announced the results of a nearly yearlong effort to assess the finances of 150 banks, identifying 13 that still need to come up with a total of €9.5 billion ($12 billion) in extra capital.
Overall, 25 banks technically failed the so-called stress tests, facing a cumulative shortfall of €24.6 billion. But most have already taken steps to solve their problems since the end of 2013, the cutoff date for the exercise.
To pass the tests, banks had to show that they had ample capital to survive a crisis that would cause Europe’s economy to fall 7% below current forecasts and the unemployment rate to rise to 13%.
The exams are part of an effort to reassure investors and the public that, following years of destabilizing banking meltdowns and long after the U.S. defused its financial crisis, Europe’s lenders are back on solid footing. Restoring that confidence is a top priority, because the continent’s sluggish economy needs healthy banks to provide loans to households and businesses.
For the ECB, Sunday’s results are the final milestone before it takes over supervision of major eurozone banks on Nov. 4. Turning the ECB into the currency union’s bank watchdog is a key step to setting up a so-called eurozone banking union. The hope is that moving control over important banks out of national hands will prevent the kind of banking crises that rocked Ireland, Spain and Cyprus in recent years.
Investors and analysts mostly applauded the tests, saying they appeared to be much more rigorous than previous years’ versions. But some expressed disappointment that European Union supervisors didn’t take the opportunity to get more banks to thicken their capital cushions.
Philippe Bodereau, global head of financial research at Pimco, said the regulators’ strictures were a step in the right direction. But “I would have preferred they be a bit tougher and force more [banks] to raise capital,” he said.
The most prominent bank to trip up in the stress tests was Banca Monte dei Paschi di Siena SpA, which is short €2.11 billion in capital under the ECB tests. The Tuscan lender, which is the world’s oldest bank and Italy’s third-largest, now faces an uncertain future. It said Sunday that it had hired outside investment banks to help it assess strategic options, which people familiar with the matter said include possibly selling itself to a stronger rival.
Italy’s overall results cast a further shadow over the country’s financial system and its moribund economy, which is the eurozone’s third-largest. “Bank of Italy has a lot of explaining to do,” said
Beyond Italy, Cypriot and Greek banks fared poorly in the tests, with three failures each. Authorities in both countries said the outstanding capital shortfalls were manageable.
Banks that received failing marks, and which haven’t already filled their capital holes, now have two weeks to explain to regulators how they plan to overcome the deficits. They will then have up to nine months to implement those plans.
Banks in Spain and Germany, which have been a focal point for investor angst about hidden losses, largely aced the tests, with just one small bank in each country failing. Several midsize regional lenders in Germany, however, barely squeaked by, suggesting they could face investor and regulatory pressure to fortify their balance sheets.
“This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector,” said ECB Vice President Vítor Constâncio. “This should facilitate more lending in Europe, which will help economic growth.”
The ECB said that under its worst-case economic scenario, banks’ capital cushions were depleted by a total of €263 billion.
Previous versions of stress tests, in 2010 and 2011, were widely criticized due to computational problems and because banks that received passing marks required taxpayer bailouts soon after. Partly as a result of failing to quickly deal with banks’ weaknesses, Europe’s financial crisis dragged on far longer than that of the U.S.—which swiftly recapitalized its ailing lenders. Just this summer, the sudden collapse of Portugal’s second-largest lender, Banco Espírito Santo SA, rattled European markets.
‘Bank of Italy has a lot of explaining to do.’
Analysts and investors expect the tests to prompt an overall boost to banks’ stock prices and potentially unleash a wave of consolidation as concerns ease about skeletons lurking in banks’ closets.
—Viktoria Dendrinou, Todd Buell and Giovanni Legorano contributed to this article.
