Europe’s top banks in spotlight Chance Italy could spark euro zone crisis
LONDON — Europe’s top banks will learn yesterday how they have fared in their latest stress test, which could require some to raise capital or shed assets, with Italian lenders expected to come under close scrutiny.
The European Banking Authority (EBA), the European Union’s banking watchdog, is due to publish the results of 48 banks at 1700 GMT, in what is being touted as its toughest test since the exercise began in 2009.
While there is no pass/fail mark, supervisors will determine how much capital lenders should be holding or which risky assets should be sold. As well as the Italian banks, analysts expect Deutsche Bank, Germany’s biggest lender, to be closely watched after three years of losses.
The health check was implemented to identify any capital holes and avoid government bailouts like those during the financial crisis.
This time the tests measure banks’ ability to withstand theoretical market shocks like a rise in political uncertainty against a backdrop of falling economic growth, a disorderly Brexit or a
While there is no pass/fail mark, supervisors will determine how much capital lenders should be holding or which risky assets should be sold.
sell-off in government bonds and property.
Investors will focus on how much core capital banks hold against a 5.5 per cent level under the most “adverse” scenario.
While no bank is expected to fall below this mark, those that are seen as too close may come under market pressure.
Europe’s banks still lag US counterparts in profitability, quality of loans and cost discipline and the region’s banking index has lost more than 20 per cent this year.
Thirty-three of the banks in the test are in the euro zone, where the main supervisor is the European Central Bank, which is separately testing a further 60 smaller banks. Some of these are struggling, but their results will not be published.
The results could heighten concerns over Italy’s banks, which have come under pressure because of a drop in the value of their large holdings of Italian debt. Banco BPM’s results are being closely monitored because its capital buffer is lower than rivals.
Monte dei Paschi performed worst in the last test in 2016 and has since been bailed out by Rome. But along with lenders from Greece and Portugal, it is not included this time.
“I would not expect the extreme results that we saw in 2016 when Monte dei Paschi was such an outlier,” Daniel Quinten, cohead of KPMG’s ECB office in Frankfurt, said.
This year’s EBA test will include a new accounting rule that forces banks to make provisions much earlier for souring loans. — REUTERS BERLIN — There is at least a chance that Italy’s rising borrowing costs could trigger a new sovereign debt crisis in the euro zone, JP Morgan chief Jamie Dimon told the German newspaper Handelsblatt.
His position appeared at odds with that of European Economic Affairs Commissioner Pierre Moscovici who said yesterday that he saw no signs of any contagion at this stage from problems over Italy’s economic and political situation.
Italy’s borrowing costs have been rising under a new anti-austerity coalition government that plans to boost deficit spending to revive the economy.
The risk premium Italy pays over safer German Bunds has climbed to a 5-1/2 year high due to Rome’s plans to raise next year’s deficit to 2.4 per cent of domestic output under a draft budget which has been rejected by the European Commission and has raised concerns of a credit crunch.
“I don’t know if the likelihood is two or 20 per cent,” Dimon said. “But, yes, it could happen.”
Asked about the exposure of banks in Italy which hold a large chunk of the country’s sovereign bonds to a future debt crisis, Dimon said the banking sector could not be stable if the government in Rome was unstable.
“If the sovereign debt of their country are worth nothing then the banks would not manage,” Dimon said. “This relationship is closer than most people think.”
European banking supervisors have stepped up their monitoring of liquidity levels at Italian banks after a sharp increase in the country’s government bond yields, although there is no cause for alarm, a source told Reuters this week.
A budget standoff between Rome’s anti-establishment government and European Union authorities on Tuesday pushed Italy’s benchmark 10-year debt costs to 3.72 per cent, the highest level since February 2014.
Italian banks are vulnerable to sovereign debt problems because they hold around 375 billion euros of domestic bonds - or 10 per cent of their assets - and the spike in yields, by hurting the value of those holdings, eats into their capital levels. — REUTERS