EU stress tests show world’s oldest bank to be wiped out by economic shock

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Banca Monte dei Paschi di Siena, the world’s oldest bank, would see its capital wiped out in a severe economic downturn, according to European stress tests which also gave relatively weak results for Deutsche Bank and Societe Generale.

In the worst-case scenario of the European Banking Authority’s test, MPS’s ratio of ordinary equities to risk-weighted assets fell from 9.86% to minus 0.1%, effectively rendering it insolvent.

Regulators used the scenario of a 3.6% drop in the EU’s gross domestic product and an unemployment rate reaching 12.1% to test the evolution of banks’ balance sheets.

The Italian government, which bailed out MPS in 2016, began exclusive talks with UniCredit on Thursday over a sale of parts of the troubled bank.

When UniCredit chief executive Andrea Orcel discussed a potential deal for MPS on Thursday, he said no acquisitions should affect UniCredit’s senior capital position of common stock. “Regardless of the effects when we put the two pieces together, our CET1 needs to stay at the same level as before,” he said.

UniCredit fared much better in the stress test, with its CET1 ratio dropping from 15.14% to 9.22%.

Other major lenders experienced sharp deterioration in their balance sheets under the scenario. Deutsche Bank’s capital ratio fell from 13.63% to 7.43% and that of Société Générale from 13.16% to 7.54%.

While there is no pass or fail in EBA’s bank balance sheet stress tests, the results are important because supervisors use them to calculate whether banks should increase their capital and how much they can. pay out dividends.

The overall results show that even in the worst-case scenario of “lower for longer” EBA, the sector would on average maintain a Tier 1 capital ratio of just over 10%, compared to the current 15%.

José Manuel Campa, President of the EBA, told the Financial Times: “The industry must be cautious and cautious in assessing the positions it has vis-à-vis sectors and particular counterparties that are affected by Covid. Early detection of a potential deterioration in credit quality is important.

He added: “The resilience of the sector is high in all countries, but we are seeing a larger effect on banks that rely more on credit portfolios. ”

Javier García, partner in the financial services practice of Oliver Wyman, said: “It sounds like an acknowledgment that we are slowly getting back to normal. It doesn’t mean that [we will avoid the] potential wave of flaws to come in the books. But we have the impression that the worst is over. Special measures seem to have worked as the banks’ financial results for the first half of the year are there. ”

The broadly resilient results were widely expected, especially after Andrea Enria, chief supervisor of the European Central Bank and former EBA president, told MEPs in early July that she would lift her cap on dividends and share buybacks in euro zone banks.

The restrictions were put in place last year to protect bank balance sheets at the height of the coronavirus pandemic.

This year’s stress test was originally scheduled to take place last summer, but has been delayed for 12 months due to the pandemic.