April 4, 2017 / 9:01 PM / 4 months ago

Italy's Veneto banks confirm capital shortfall of $6.8 billion

FILE PHOTO: The logo of Veneto Banca bank is seen in Venice, Italy, January 31 2016.Alessandro Bianchi/File Photo

MILAN (Reuters) - Struggling Italian regional lenders Banca Popolare di Vicenza and Veneto Banca confirmed on Tuesday the European Central Bank has estimated they have a combined capital shortfall of 6.4 billion euros ($6.8 billion) after stress tests by the regulator last year.

In almost identical statements, the two banks said that the ECB had indicated they both qualified for a so-called precautionary recapitalization by the state.

The scheme, already used by Italy's fourth biggest lender Monte dei Paschi di Siena (BMPS.MI), takes advantage of an exception to EU banking liquidation rules that allows public money to be injected into ailing banks with a limited contribution from their creditors.

The European Commission must now decide whether the two banks' requests for public support breaches EU state aid rules, and approve their restructuring plans for the funds to be unlocked. On Monday, a spokesman for the Commission said it was confident that a solution could be found in the coming weeks.

The capital shortfall was calculated taking into account the lenders' score in the adverse scenario of the stress tests, whose results had not been previously made public.

Two sources close to the matter had earlier put the capital gap for the two banks at 6.4 billion euros. One of the sources said the ECB considered the lenders solvent, a key condition for them to receive the state bailout they have requested.

Popolare di Vicenza said in its statement it had failed the stress test adverse scenario, which looked at how banks could withstand a three-year theoretical economic shock, recording a Common Equity Tier 1 ratio at the end of 2018 of minus 3.19 percent against the 8 percent minimum requirement set by the ECB. That shortfall translated into a capital gap of 3.3 billion euros according to ECB calculations, the bank said.

Veneto Banca said it had also failed the baseline scenario of the tests, but that shortfall had been plugged thanks to an injection of capital by Italian bank bailout fund Atlante.

The state-sponsored fund - financed mostly by private banks and financial institutions - rescued both Popolare di Vicenza and Veneto Banca last year after they failed to raise funds on the market. It has invested nearly 3.5 billion euros to save them.

Under the adverse scenario, Veneto Banca recorded a capital shortfall of 3.1 billion euros, as its CET 1 ratio came in at minus 2.56 percent versus the 8 percent threshold.

The two banks said the capital shortfalls estimated by the ECB will be used to calculate the final amount of the precautionary recapitalization.

Italy, which has set aside 20 billion euros to rescue ailing lenders saddled with bad loans, is already expected to spend 6.6 billion euros to bail out Monte dei Paschi.

($1 = 0.9376 euros)

Editing by Hugh Lawson

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