Banks to submit delivery plan for €10bn shortfall

in Frankfurt

Eleven banks must submit plans to the European Central Bank within the next fortnight outlining how they will meet a collective shortfall of about €10 billion following the publication of the ECB's stress tests yesterday.

In total, 25 banks failed the central bank's comprehensive assessment exercise, clocking up a combined capital shortfall of €25 billion. However, 12 banks were deemed to have already taken sufficient measures to address the shortfall this year, most through the issuance of core tier one equity. Eleven remaining banks, including Permanent TSB, will now have to restructure or downsize in compliance with European Commission restructuring plans, or raise capital on the markets, the ECB said yesterday. Two Greek banks have been exempted in light of their ongoing restructuring plans.

Italy had the highest failure rate, with nine banks, including the world's oldest, Banca Monte dei Paschi, failing the tests. Three Greek banks also failed while Cyprus, Slovenia and Belgium had two banks rejected. The remaining banks that failed were in France, Germany, Ireland, Austria and Portugal. Some 130 banks were assessed by the ECB in conjunction with national supervisors as the central bank prepares to assume supervisory responsibility for the bloc's biggest banks next Monday.

‘Credible’

Speaking yesterday in Frankfurt following the publication of the results, ECB vice-president

Vitor Constancio

said the tests were “credible” and “rigorous” and provided “unprecedented transparency” into the state of the euro zone banking system. The assessments, which comprised a “point-in-time” asset quality review and a “forward-looking” stress testing of balance sheets would help to create “a level playing field for supervision in the future”, he said.

Danièle Nouy, the head of the ECB’s new supervisory wing, said the introduction of a standard definition of non-performing loans was “a major step forward in terms of comparability across banks and countries”. The ECB is due to begin supervising the euro zone’s biggest banks in a week’s time in a major shift of power away from national supervisors to a pan-European regulator as the Single Supervisory Mechanism (SSM) comes into operation.

Under the methodology set out in the stress tests, banks were required to hold a minimum of 8 per cent core tier one assets, and a minimum of 5.5 per cent in a stressed scenario, a figure “well above “ the regulatory minimum, Mr Constancio said yesterday.

Deflation

The Portuguese vice-president of the ECB rejected suggestions that the tests had not taken account of possible deflation in the euro zone in its adverse scenario projections. “The scenario of deflation is not there, as we don’t think deflation is going to happen, but let me highlight, nevertheless, that whereas the baseline scenario in the first test has inflation at 1.6 per cent in 2016, in the adverse scenario it comes down to 0.3. Inflation is indeed factored in in the exercise.”

The euro zone has been battling falling inflation over the past year, as its economy fails to shake off the legacy of the sovereign debt crisis. In Brussels on Friday, ECB president Mario Draghi called on euro zone leaders to "act jointly" to avoid a relapse into recession.

In a statement yesterday the Bank of Italy said it expected the shortfalls revealed in the Italy to be covered privately. “The [finance] minister is confident that the residual shortfalls will be covered through further market transactions and that the high transparency guaranteed by the comprehensive assessment will allow to easily complete such transactions.”