Europe’s top banks in spotlight Chance Italy could spark euro zone cri­sis

Viet Nam News - - WORLD BUSINESS -

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.

Lag­ging be­hind

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

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