10 Other EU Banks would be Tripped up by ECB’s Monte Paschi Capital Bar

The potential objections to the plan of European Central Bank’s capital demands on Banca Mote deiPaschi di Siena SpA based on stress-test results, were highlighted in reports that Deutsche Bank AG, UniCredit SpA and eight other European Union banks would fall short of the capital demands.

in the adverse scenario of the stress test, the Bank of Italy said in a statement in Dec. 29 that the ECB had told Monte Paschi it needed enough capital to push its common equity Tier 1 ratio to 8 percent of risk-weighted assets. In 2014 lenders were held to a CET1 ratio of 5.5 percent even as this year’s health check had no pass mark.

Preceding Allied Irish Banks Plc with 4.3 percent, with a CET1 ratio of minus 2.4 percent, Monte Paschi was the worst performance in the stress test’s adverse scenario. Monte Paschi is being planned to be bailed out by the Italian government. The  absence of a hurdle means the size of the gap could be disputed when Italy seeks approval for the rescue from the European Commission even as under European Union law, state aid can be given to solvent banks to cover a stress-test shortfall.

“There’s a lot more to be explained,” said John Raymond, senior European bank analyst at CreditSights. “They just say, ‘Oh, this is needed to get to 8 percent,’ as if we all knew the number was 8 percent, when in fact that’s a completely new number.”

A shortfall of 8.8 billion euros ($9.3 billion) is the result of the ECB’s demands for an 8 percent CET1 ratio and a total capital ratio of 11.5 percent, the Bank of Italy said.

According to the Bank of Italy, with 4.2 billion euros coming from converting subordinated debt to equity and the remainder provided by the government, closing the CET1 gap requires 6.3 billion euros of high-quality capital. to reach the 11.5 percent total ratio, another 2.5 billion euros will be needed to offset capital lost in the debt-to-equity conversion.

To restore market confidence, it is intended to hold the CET1 premium of 3.5 percentage points above the legal minimum, sources said.

While UniCredit had 7.1 percent, Deutsche Bank emerged with a CET1 ratio of 7.8 percent, in the stress test. 7.3 percent and 7.5 percent, respectively  were the CET1 ratios of Barclays Plc and Societe Generale SA.

To confirm that the bank meets minimum capital requirements and is solvent, the first step in a precautionary recapitalization is for the supervisor — the ECB in Monte Paschi’s case. Under the adverse stress-test scenario, the capital shortfall has to be determined by the supervisor. Both those boxes have been checked.

Raymond said that “because you could argue that they are closer to the adverse scenario being realized,” Monte Paschi’s poor showing in the stress test could be used to justify a higher capital threshold.  “But at the same time they are arguing they are solvent and meet the capital rules.”

He said that pushing back against the ECB’s demand could be a fallout of this.

It would work with Italy and the ECB to “assess the compatibility of the planned intervention by the Italian authorities with EU rules”, the Brussels-based European Commission, the EU’s executive arm, said on Dec. 29.

(Adapted from Bloomberg)

Categories: Economy & Finance, Sustainability

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