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From Paschi to German Lenders, Investors Brace for Stress Te

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From Paschi to German Lenders, Investors Brace for Stress Te

por acintra » 22/7/2016 7:55

From Paschi to German Lenders, Investors Brace for Stress Tests
John Glover
JohnEGlover
Nicholas Comfort
nickcomfort
July 22, 2016 — 12:01 AM WEST


Italian banks, whose woes have prompted a debate over state aid, may not be the only ones in the spotlight next Friday when regulators publish their latest health check on Europe’s largest lenders.
Though Italy’s Banca Monte dei Paschi di Siena SpA will probably attract the most scrutiny with its mountains of soured debt, German, Austrian and Nordic banks also may be shown in an unpleasant light when the London-based European Banking Authority sets out its findings.
“If you do get a surprise, it will probably be a negative one, said Paul Fenner-Leitao, a credit analyst at Societe Generale SA. “People might just shrug it off, but it could remind investors that all still isn’t well in Europe years after the crisis.”
Political turmoil stemming from the U.K.’s decision to leave the European Union rattled investors already concerned that capital weakness could put coupon payments and dividends at risk. Record-low interest rates and slow growth are hampering banks’ efforts to bolster capital. That has prompted calls for capital injections in banks in Italy and elsewhere eight years after the global financial crisis peaked in 2008.

State Help
The Italian government is in talks with European leaders about using state funds to shore up capital at banks burdened with about 360 billion euros ($396 billion) in soured debt. The country’s leaders are trying to reach an agreement that allows them to help the banks without imposing large losses on bondholders, many of which are depositors and other small investors.
European Central Bank President Mario Draghi said Thursday he would welcome a public backstop to address the non-performing loans plaguing many banks though he said any measures should be agreed with regulators and comply with existing rules.
Governments should be allowed to take temporary equity stakes in banks, BlackRock Inc. Vice Chairman Philipp Hildebrand wrote in the Financial Times earlier this month. Recipients should be required to sort out structural issues including provisions to encourage consolidation and to diversify income sources, Hildebrand wrote. Deutsche Bank AG Chief Economist David Folkerts-Landau has argued that Europe needs a 150 billion-euro bailout fund to recapitalize its banks.

Restrictive Rules
Europe’s Bank Recovery and Resolution Directive makes state recapitalization of solvent banks contingent on the results of stress testing. Taxpayers can be used to cover a capital shortfall without triggering resolution when it is needed to “remedy a serious disturbance in the economy of a member state and preserve financial stability.”
The tests on Europe’s 51 biggest lenders are done under two scenarios. The baseline follows economic forecasts for the bloc set out last year by the European Commission. The stressed, developed by the EBA and the European Systemic Risk Board, includes shocks to interest rates, exchange rates, stocks, real estate and commodity prices, among others.
There is no pass/fail mark this year and capital levels are expected to remain within regulatory minimums in the baseline scenario. Lenders whose capital drops below the minimum in the stressed scenario can expect to receive “guidance” from the European Central Bank, including on their capital planning.

Few Surprises
“I think the number needing capital will be relatively small, given the previous tests and the improvement at those banks,” said Steve Hussey, a London-based analyst at AllianceBernstein, which manages about $490 billion. “Given the adverse scenario isn’t that adverse, I don’t think you’re going to get anything necessarily very surprising. It’s all about Monte, really, and what the solution is.”

A shortfall in the stressed case won’t by itself trigger resolution and isn’t reason enough to increase capital requirements immediately, as it was in previous rounds. For banks seeking state capital injections, any shortfall could affect how much aid they can receive. While Monte Paschi and other Italian banks will be the focus, other lenders may have a negative surprise in store, Societe Generale’s Fenner-Leitao said in a note to clients.
The Nordics may be hit by the “tough-scenario assumptions” for the Swedish economy and house prices there, while Deutsche Bank AG’s weaknesses have put the spotlight onto issues at other German banks, as well, he said. Austrian lenders may suffer under “notably bearish” assumptions for the Austrian economy and painful recessions in central and eastern Europe.

ECB Demands
The ECB has taken over supervision of Italy’s biggest lenders and is demanding action, including at Monte Paschi. It has asked the Siena, central Italy-based bank to reduce its tally of soured loans by more than 14 billion euros by 2018.
Instead of acting to tackle the banking system’s weakness by pumping money in and forcing lenders to get bad debts off their balance sheets, the country is likely to prevaricate, said Hussey.
“Italy is kicking the can down the road and muddling through, partly because of the constraints around state aid,” he said. “They will likely come up with a creative solution to staunch the bleeding at Monte, but given the scale of the problems and political vested interests elsewhere, I’m skeptical that we’ll get a neat solution for Italy’s banking issues anytime soon.”
Um abraço e bons negócios.

Artur Cintra
 
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