ECB announces stress test results with few surprises

The results of the ECB/EBA stress tests on the EU banking sector were announced on October 26. The resilience of banks’ balance sheets was assessed under a baseline and an adverse scenario.

Main findings of the stress test

Overall, the findings of the stress test were in line with expectations:

  • no major bank was found in capital shortfall;
  • the banks that failed had low Common Equity Tier 1 (CET1) levels before the exercise;
  • Italy’s banking sector took the heaviest hit as nine banks failed the stress test; and
  • the three Greek banks that failed only showed a limited shortfall after accounting for their restructuring plans (only €20 million for Eurobank).

Capital shortfall findings

The EBA’s final report found that under its adverse scenario, a €24.19 billion capital shortfall would arise in 2016 across 24 banks. However EU banks have already raised €17.9 billion of capital in 2014, reducing the gap to €9.52 billion. The capital shortfall is decreased further to €6.4 billion, after accounting for the Greek restructuring plans and after excluding the shortfalls of the two Slovenian banks and the Belgian bank Dexia (which is under state guarantees).

Half of the residual shortfall (€3.3billion) is found in four Italian banks, with Monte Dei Paschi showing the biggest potential for losses (€2.1billion). The rest of the gap identified includes €1.15 billion from a Portuguese bank (Banco Comercial Portuges, SA), €0.86billion from an Austrian bank (Österreichische Volksbanken-AG) and €0.85billion from an Irish bank (PTSB plc). PTSB’s shortfall is expected to be resolved shortly as the bank is finalising its restructuring plan with the EU.
In sum, the capital shortfalls identified in the report arise mostly from:

  • four Italian banks. This was widely expected as they all had a low CET1 ratio before the stress test. For example, Monte Dei Paschi was at 7%.
  • Banco Comercial Portuges and Österreichische Volksbanken. This result was surprising because they both had restructuring plans in place and good levels of CET1 (10.3%).

Banks that failed the exercise have two weeks to submit new capital plans that will cover the shortages.

For the latest updates on the ECB/EBA stress tests, watch this space.