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EU stress tests show world’s oldest bank would be wiped out in economic shock

Bank stress tests updates

Banca Monte dei Paschi di Siena, the world’s oldest bank, would see its capital wiped out in a severe economic downturn, according to European stress tests that also delivered relatively weak results for Deutsche Bank and Société Générale.

Under the worst-case scenario in the European Banking Authority’s test, MPS’s ratio of common equity to risk-weighted assets dropped from 9.86 per cent to minus 0.1 per cent, effectively rendering it insolvent.

Regulators used the scenario of a 3.6 per cent fall in EU gross domestic product and unemployment reaching 12.1 per cent to test how banks’ balance sheets fared.

The Italian government, which bailed out MPS in 2016, entered into exclusive talks with UniCredit on Thursday over a sale of parts of the ailing bank.

When UniCredit’s chief executive Andrea Orcel discussed a potential deal for MPS on Thursday he said any acquisition must not affect UniCredit’s common equity tier one capital position. “Whatever the effects are as we put the two pieces together, our CET1 needs to remain at the same level as it was before,” he said.

UniCredit fared much better under the stress test, with its CET1 ratio falling from 15.14 per cent to 9.22 per cent.

Other large lenders suffered sharp deteriorations in their balance sheets under the scenario. Deutsche Bank’s capital ratio fell from 13.63 per cent to 7.43 per cent and that of Société Générale fell from 13.16 per cent to 7.54 per cent.

While there is no pass or fail in the EBA’s stress tests of banks’ balance sheets, the results are important because supervisors use them to calculate whether banks need to increase capital and how much they can pay out in dividends.

The overall results show that even under the EBA’s worst-case “lower for longer” scenario, the sector would on average retain a common equity tier one capital ratio of just over 10 per cent, down from 15 per cent at present.

José Manuel Campa, chair of the EBA, told the Financial Times: “The industry needs to be prudent and careful in assessing the positions they have to the sectors and particular counterparties that are affected by Covid. Early recognition of potential deterioration in credit quality is important.”

He added: “The resilience of the sector is high across all countries, but we do see a bigger effect on those banks that have a higher reliance on credit portfolios.”

Javier García, a partner in Oliver Wyman’s financial services practice, said: “It feels like a recognition that we are getting back to normal slowly. That doesn’t mean that [we will avoid the] potential wave of defaults coming through the books. But it feels like the worst is over. Special measures seem to have worked as bank financial results for the first half-year are showing.”

The overall resilient results had been widely expected, especially after Andrea Enria, the European Central Bank’s head of supervision and former chair of the EBA, told MEPs at the start of July that it would lift its cap on dividends and share buybacks at eurozone banks.

The restrictions were put in place last year to protect bank balance sheets at the height of the coronavirus pandemic.

This year’s stress test was originally due to take place last summer but was delayed by 12 months because of the pandemic.

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