Twenty-five banks among one hundred and thirty in the euro zone, or one in five, were repositioned to the great European stress test after a new serious economic crisis, announced the European Central Bank (ECB), Sunday, October 26.
Twenty-five institutions located mainly in southern and eastern Europe – Italy, Greece and Slovenia – and, in a scenario of severe recession, will have to reinforce their total equity to 25 billion euros.
None of the five major French bank, no big either European or German Deutsche Bank, nor the Italian Unicredit, nor the Spanish Santander are included in the red list.
The European monetary authority chose Sunday, the day of universal closure of financial markets, without possibility to publish the highly anticipated results of a health check of the European banking sector, carried out with the support of the European Banking Authority (EBA).
It has been six years after the global financial crisis of 2008, but unlike the United States, the euro area had not undertaken extensive check-ups of its banking system, a condition which is essential to the restoration of confidence and restart of the economy. It is being done now; and what is more, on the basis of financial statements previously scrutinized.
Exercise seems likely to establish the legitimacy of the ECB as a future bank supervisor of the euro, a role it will assume as of November 4. “This is an unprecedented exercise in transparency. It will show if the economic assumptions used to anticipate the next crisis are relevant,” said Christian Jimenez, president of the independent company Diamant Bleu Gestion.
If the health check may seem mixed, it must be immediately put into perspective. Because the tests were carried out on the basis of assessments of the end of 2013 and do not reflect the great effort from the banks to strengthen their capital: 60 billion collected from August 2013 to September 2014, on strong incentive of national supervisors, anticipating these tests to limit the damage.
If these efforts are integrated, there will be no longer twenty-five banks that fail but actually thirteen, as the ECB said on Sunday: four Italian, two Greek, two Slovenian, Austrian, Portuguese, Irish, Cypriot and the Franco-Belgian bank Dexia (already being dismantled). And lack of accumulated capital is not more than €25 billion but $9.5 billion, which is by far a better score. Above all, a more manageable for each bank and each of the States concerned problem.
The countdown of the race to capital is launched, the ECB has announced that banks who have failed would have fifteen days to submit a plan of recapitalization. And six to nine months to put it into execution.
In theory, these thirteen ailing banks – except for Dexia, already under US tutelage – attempt to raise capital in the coming months. But in practice, plans to recapitalize or sell assets are already committed to address the deficiencies. And some banks should try to emphasize the positive impact of these measures from the ECB to underestimate their lack of capital. This is the case of Greek, who said Sunday night, have held discussions in this regard with the monetary authority.
Other banks may decide to throw in the towel to get in a situation of “run-off” (stop their activities), following the example of the Austrian Österreichische Volksbanken-Verbund, which will waive 860 million missing. The case of Slovenian banks, already under public infusion, will be monitored.
In total, how many billions will be raised? 9 planned? Or 7 or less, as we already hear? Difficulties should crystallize in a few countries and difficult cases. Such as Italy, where the banking system weakened spring tests, with Banca Monte dei Paschi di Siena showing the biggest deficit in European capitals. So 2.1 billion to find by mid-2015, despite efforts in recent months.
The case of Banco Comercial Português (1.1 billion missing, however, may decrease the amount), the Irish Permanent TSB (850 million), the Italian Banca Carige (810 000 000) or the Cypriot Hellenic Bank (180 million) will be closely scrutinized. These records may mobilize their respective states.
In addition, there may be other pressures on banks that have passed the tests of accuracy, especially in Germany on the DZ Bank, Central Bank of German cooperative sector.
Ultimately, there will be before and after tests. And thus, the exercise of transparency launched by the ECB will reach its goal. “The European Union cleans its “zombie” [term borrowed from the banking crisis of the 1990s in Japan]. That objective is already achieved. But the capital raising will not be spectacular, and it should not depend on that to restore credit,” predicts Jerome Legras, Director of Research of the Axiom Alternative Investments.