Stress tests give EU banks a clean bill of health

European regulators gave most banks a clean bill of health in ‘stress tests’ despite the Continent’s sluggish growth.

Struggling Italian lender Banca Monte dei Paschi di Siena was at the bottom of the pack of 51 banks assessed under the EU’s latest round of stress tests.

European regulators gave most banks a clean bill of health in “stress tests” despite the continent’s sluggish growth and low interest rates, saying only a clutch of lenders would struggle to ride out a hypothetical severe economic downturn.

The European Banking Authority released results on Friday of its latest stress test showing how much capital, or cushion against losses, banks would have left on their balance sheets in an adverse economic scenario. The tests come after European banks climbed out of the 2010 eurozone crisis but have continued to grapple with low profits, bad loans and, sometimes, management problems and turnover, all of which have translated into struggling stock prices.

Struggling Italian lender Banca Monte dei Paschi di Siena was at the bottom of the pack of 51 banks assessed, underscoring investor sentiment that the bank is a worrisome vulnerability in the country’s system and needs to raise substantial funds.

Other major banks that suffered sizeable hits to their capital buffers included UniCredit, Barclays and Deutsche Bank.

Hours before the results were made public, the board of Monte dei Paschi unveiled a plan to unload non-performing loans and raise up to €5 billion ($10.84bn) in capital. Because the Siena-based bank was expected to be the worst performer in the test, its management was eager to come up with a plan to head off a crisis of confidence .

The European Central Bank said the exam used a less severe scenario than the toughest one used in stress tests for US banks in June, in which 31 out of 33 US lenders, including big firms such as Bank of America and Citigroup, passed. In addition, the EU tests didn’t include struggling Greek and Portuguese banks this year, which could help account for the relatively rosy results despite Europe’s woes. Such lenders are being privately tested by regulators, and the results won’t be made public.

In addition, the banking authority’s toughest economic scenario didn’t factor in negative rates or the effects of a Brexit. Regulators said the scenarios tested were gloomier than most of the predicted impact from the Brexit vote.

Unlike in previous EU stress tests, regulators didn’t include a pass or fail result for each bank related to a specific capital amount. Instead, the EBA has left it up to investors and regulators to interpret the results.

Broadly, investors were looking for banks to maintain at least a 5.5 per cent ratio of top-quality capital in the test scenario, analysts said. Of the “systemically important” European banks, Italy’s UniCredit fared the worst, with a ratio of 7.1 per cent. British bank Barclays had a capital ratio of 7.3 per cent.

Deutsche Bank had a 7.8 per cent capital level, better than some analysts had expected. Investors had been concerned that the German lender could face an ill-timed capital crunch. The results show that Germany’s largest lender by assets must continue to cut costs and reduce risky assets to boost its buffer against losses.

Deutsche Bank chief executive John Cryan said the test showed the bank was “well equipped for tough times” and on track to reach capital goals.

UniCredit said it would take the results into consideration as it developed its new plan. Some analysts said they had expected Barclays to meet a higher capital ratio threshold of 7.5 per cent.

Such an expectation potentially raises pressure on the bank to bolster its balance sheet. It said was focused on a separate Bank of England stress test expected later this year.