Brussels, 27/10/2014 (Agence Europe) - The results of the health check on the European banking sector, which was carried out by the ECB and the European Banking Authority (EBA), show the scale of the recapitalisation efforts made by the sector since summer 2013, which have been put at nearly €200 billion.
The European banks are more robust and demonstrating that they are capable of riding out a sharp and sustained downturn in the economy. Their assets have been valued more fairly using common methodology, particularly as regards profit/losses and exposure to sovereign risks. Just a few banks, mainly Italian ones, were singled out for criticism.
The day after the results were announced, Monday 27 October, the Italian banking sector came under fire from the markets. Following a drop of in excess of 15%, the contributions of the banks Monte dei Paschi di Siena (MPS) and Carige were suspended, with the possibility of a merger between MPS and another bank under discussion.
The European and national regulators hope that this unprecedented transparency exercise will help to restore confidence and ultimately resume lending to the economy, with bank funding representing more than 80% of funding granted to businesses in Europe.
“This unprecedented in-depth review of the largest banks' positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth”, said the vice-president of the ECB, Vítor Constâncio, on Sunday 26 October, when the results were announced. He went on to state that the exercise was a “cornerstone” in setting in place the 'single supervision' plank of banking union in the eurozone, whereby the ECB will directly supervise 119 banks of systemic importance.
These results will make it possible to “identify the vulnerabilities that remain”: where banks do not hold enough capital, measures must be taken in the coming weeks, said the outgoing Commissioner for the Single Market, Michel Barnier, who went on to stress that this full health check is “not an end in itself”, but a tool to allow banks to be “sufficiently solid” and have the “capacity to finance the economy in a sustainable manner”. Warning against any complacency as a result of the results published, the European institution's priority will be to guarantee that the recapitalisation efforts of the banks singled out complies with Community legislation and is provided first and foremost through private resources. If public financial aid proves necessary, this must comply with the European rules revised in summer 2013 on state aid to the financial sector in times of crisis.
The MEP Roberto Gualtieri (S&D, Italy) described the publication of these results as a “crucial step” towards the full implementation of the banking union that will “put an end to market fragmentation”. Noting that the capital shortfall observed is “below market expectations”, the chair of the economic and monetary affairs committee of the European Parliament argues that the health check created the right incentives for the banking sector to “anticipate” the results by raising capital and cleansing their balance sheets. He said that he was “confident” that the 13 financial institutions under fire would present “credible” recapitalisation plans by 10 November. He went on to announce that the Competition Commissioner, Margrethe Vestager, would be addressing the parliamentary committee the day after this deadline.
Favourably welcoming the compatibility of the results, which will allow investors to make their own assessments of the health of the European banking sector, the IMF welcomed the ECB's intentions of repeating the exercise “every year”, constantly improving it.
The industry also welcomed the proven solidity of the sector and its capacity to ride out severe recession, speaking through the European Banking Federation (EBF). According to the ECB, European banks have strengthened their solvency by injecting own funds of more than “200 billion euros” since July 2013. “These results clearly confirm that our sector now is in a much better shape than a few years ago. They should dispel any lingering doubts on the health of the European banking sector”, said the Federation's Chief Executive Wim Mijs, who now hopes to continue work on “strengthening Europe's financial services markets”.
Two closely dovetailed exercises for a full health check
The ECB carried out an asset quality review (AQR) of the assets recorded at the end of 2013 on the balance sheet of the 130 largest banks in the eurozone, representing 82% of the total banking assets of the eurozone. By setting the lower solvency ratio (proportion of optimum quality CET1 capital to total assets) at 8%, it showed a capital deficit of €25 billion in 25 banks established in Italy (nine banks), Greece (three), Cyprus (three), Belgium and Slovenia (two banks each), Germany, Austria, France, Spain, Ireland and Portugal (one bank each). As twelve of these banks have already covered their deficits using own funds, the remaining 13 must submit a recapitalisation plan to the ECB within two weeks, detailing how they plan to raise capital within six to nine months, first and foremost from private sources.
The ECB's analysis also made it possible to adjust the valuation of banking assets to the tune of €48 billion, €37 billion of which do not require recapitalisation, as well as additional exposure to non-performing loans (repayment default of more than 90 days) of €136 billion.
The EBA then carried out stress tests on 123 banks of the EU plus Norway. In addition to the scenario setting the minimum solvency ratio at 5.5% in the event of an adverse scenario (sharp recession, steep drop in real estate prices, steep increase in unemployment between 2013 and 2016), what was new about these tests was that they included the results of the asset quality review in the underlying scenario. The results of the stress tests show a drop in the average solvency ratio observed initially, from 11.1% to 8.5%. This ratio falls to 7.6% when all capital requirements applicable by 2019 are taken on board. Over the whole of the period under examination, the capital reduction is reported to exceed €260 billion on the back of an increase in credit losses and risk-weighted assets.
The group of 24 banks - the same as those identified in the asset assessment, but not including Spain's Liberbank - failed the tests, as their capitalisation level proved to be below the minimum required (5.5% of optimum quality own funds) in the event of the adverse scenario. The total capital deficit observed stands at €24.2 billion, a sum which is reduced to €9.5 billion when taking account of the recapitalisation efforts of the banks identified since the launch of the health check.
In decreasing order, the banks which must reinforce their own funds are: - €2.11 billion for Italy's Monte dei Paschi di Siena; - €1.15 billion for Portugal's Banco Comercial Português; - €860 million for Österreichische Volksbanken-AG of Austria; - €850 million for Permanent TSB of Ireland; - €810 million for Italy's Carige.
The specific situation of the Greek and Cypriot banks, which are located in countries still under a financial bailout plan, is examined in a separate article. (MB)