Ancient Italian bank Monte dei Paschi failed the European stress tests by far and away the biggest margin, the authorities said yesterday, highlighting the dire state of the country’s financial sector.
Under the European Banking Authority’s (EBA) stress tests, its capital buffer fell to minus 0.1 per cent.
Even after plugging a portion of the gap this year, it needs to raise another €2.1bn (£1.65bn) in the next six months to avoid more regulatory action – the oldest lender in the world has hired Citigroup and UBS to help it raise capital or sell off assets.
A further eight Italian banks joined Monte dei Paschi in failing the tests, and need to raise €3.31bn between them.
Even a capital-raising itself is no guarantee of safety – Portuguese bank Espirito Santo raised more than €1bn this year shortly before its collapse.
The tests included an asset quality review (AQR), which hope to cut the chance of this happening again.
The AQR found the 123 banks in the tests had overstated their capital positions by more than €40bn, as they under-reported the level of bad loans on their books.
Overall, the 24 banks found to have failed had a capital shortfall of €24.2bn at the end of last year.
Since then they have raised €17.9bn.
That means 14 banks remain below to 5.5 per cent capital threshold.
They have two weeks to present plans to the authorities to plug the gap, and six months to implement them.
If the banks miss those deadlines, they could face forced sales to get rid of assets and improve their capital positions, or if that will not work, more extreme measures like putting the bank into administration.
The EBA did warn that the sector will have to raise more capital in future – 40 banks came in below the seven per cent level which will come into force in several years’ time.