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RPT-FACTBOX-What to watch for in European bank stress test results
July 29, 2016 / 6:01 AM / in a year

RPT-FACTBOX-What to watch for in European bank stress test results

(Repeats Factbox that ran Thursday with no changes to text)

July 28 (Reuters) - The European Banking Authority (EBA) releases the results of its 2016 health check on 51 lenders on Friday.

Here are details of what to look for in the stress tests.

THE TEST FORMAT

Unlike in previous years there will be no pass or fail. Instead the European Central Bank will use banks’ performances in the tests to set capital targets for them.

Analysts are likely to focus on whether a bank’s buffer of core capital is assessed to fall below 5.5 percent if it were subject to a theoretical economic and financial shock. The EBA used this threshold in the 2014 tests to determine whether a bank was healthy or not.

Any bank missing that threshold will be under pressure from investors to boost its capital as quickly as possible.

TEST SCENARIO

The test’s “adverse scenario” looks at how banks could cope with four risks over three years: an abrupt rise in bond yields from very low levels in a market where liquidity is thin; poor profitability at banks in a weak economy; rising public and private debt concerns; and stress from a rapidly growing “shadow banking” sector. The test will also look at banks’ operational and conduct risk for the first time, assessing for example how well they could cope with a large fine by regulators for misconduct.

POTENTIAL WEAKSPOTS

ITALY

Italy’s banking system is the weakest among the large European Union countries, with its lenders saddled with around 360 billion euros ($400 billion) of bad debt.

It has four banks undergoing tests, with its third largest lender, Monte dei Paschi, under the most pressure. Weighed down by around 50 billion euros in bad loans, there are expectations that the tests will find its capital levels insufficient to withstand a major economic shock.

Analysts at Barclays expect Monte dei Paschi to be the only bank to fall short of the 5.5 percent core capital level in the tests under the most adverse economic shock scenario.

It has been pushing in the days leading up to the tests to come up with a plan to shore up its balance sheet, hoping to win approval from the ECB for proposals to sell off around 10 billion euros of its bad debt and raise 5 billion euros in fresh capital.

UniCredit, Italy’s largest bank, has been moving quickly to boost its capital levels following the appointment of Jean-Paul Mustier as chief executive on June 30.

As the only Italian bank categorised as a globally systemically important bank (G-SIB) by the Financial Stability Board, markets will be looking to see if its core capital levels exceed 6.5 percent under the stress tests scenarios, as it is subject to a 1 percentage point capital surcharge due to its G-SIB status.

Most analysts are confident it will achieve that.

GERMANY

Deutsche Bank, branded by the International Monetary Fund as the bank posing the biggest systemic risk to the global financial system, is also in the spotlight.

Its core tier 1 capital base has fallen over the past year, sliding from 11.4 percent in June 2015 to 10.8 percent at the end of last year, trailing that held by most of its investment banking rivals. This is much less than required by ECB regulators in the mid-term and also far from the bank’s own target of 12.5 percent.

As a global systemically important bank, analysts will expect its capital levels to be at least 7.5 percent, given that its G-SIB status means it is subject to a 2 percentage point capital surcharge.

This year’s stress tests also look at banks’ litigation risks. Since 2012, Deutsche Bank has run up more than 12 billion euros in legal bills to handle claims filed by individuals, companies and regulators over misselling or market manipulation. It has made provisions of 5 billion euros for future settlements.

Analysts will want to see how much the stress test estimate of the bank’s litigation risks would dent its capital.

FRANCE

The capital levels of France’s biggest bank, BNP Paribas , are under scrutiny. Like Deutsche, its G-SIB status means analysts will use 7.5 percent as a rough benchmark for its capital level “pass mark”.

Barclays analysts have flagged it, along with Monte dei Paschi, UniCredit and Deutsche Bank as among the most vulnerable to posting a weak capital reading under the test scenarios.

However, it reported on Thursday it had a core tier one capital level of 11.1 percent as of end-June and said it was not worried about stress tests results.

WHAT‘S NOT IN THE TESTS

The EBA’s tests cover less than half of the 123 lenders covered in the last health check in 2014, meaning some areas seen as weak points in European banking are not covered this time.

None of Portugal’s banks will be included for example. Nor will any Greek banks, although the ECB did a comprehensive assessment of the country’s four biggest lenders in 2015.

The ECB has conducted tests on 56 other banks not looked at by the EBA. It won’t publish these results although individual banks can do so if they want.

THE FULL LIST OF BANKS BEING TESTED BY THE EBA

AUSTRIA

Erste Group Bank

Raiffeisen

BELGIUM

Belfius Banque

KBC Group

GERMANY

BayernLB

Commerzbank

Deutsche Bank

DekaBank

DZ Bank

Landesbank Baden-Wuerttemberg

Helaba Landesbank

NordLB

NRW.Bank

Volkswagen Financial Services AG

DENMARK

Danske Bank

Jyske Bank

Nykredit

SPAIN

BBVA

Banco de Sabadell

Banco Popular

Santander

Criteria Caixa Holding, parent company of Caixabank

BFA, parent company of Bankia

FINLAND

OP Osuuskunta

FRANCE

BNP Paribas

BPCE

Credit Agricole

Credit Mutuel

La Banque Postale

Societe Generale

HUNGARY

OTP Bank

IRELAND

Allied Irish Banks

Bank of Ireland

ITALY

Banca Monte dei Paschi

Banco Popolare

UniCredit

UBI Banca

NETHERLANDS

ABN Amro

ING

Rabobank

BNG Bank

NORWAY

DNB Bank

POLAND

PKO

SWEDEN

Nordea Bank

SEB

Handelsbanken

Swedbank

BRITAIN

Barclays

HSBC

Lloyds

Royal Bank of Scotland ($1 = 0.9015 euros) (Compiled by Reuters bureaus; editing by David Stamp)

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