Source: CNBC
The much-anticipated stress test results from the Europan Banking Authority (EBA) were published yesterday (and of course, a Friday night right before a weekend is the best way to publish some bad results). In the stress test, the EBA is trying to find how the banks will perform under an adverse economic scenario in the world. Not all banks are being covered, and the 51 banks that have been subject to the test could only be seen as some sort of sample. At best.
Source: EBA
4 banks ‘failed’, and one Italian bank even succeeded in ending up with a negative (!) capital ratio under the adverse scenario in the stress test, il faut le faire! Banca Monte dei Paschi has a baseline CET1 ratio of 12.24% in 2018, but its entire capital would be wiped out under the ‘adverse’ circumstances (which aren’t that harsh at all). The bank’s board of directors is in emergency meetings the entire weekend to quickly inject 5B EUR of fresh capital into the bank before the markets re-open on Monday.
And yes, the criteria for the stress test were actually pretty mild. The EBA investigated how a bank’s capital ratio would change using a real GDP growth rate of -1.2% in 2016, -1.3% in 2017 and a real GDP growth of 0.7% in 2018. So this doesn’t even remotely represent how bad just the prelude of the 2008 global financial crisis was. Is a GDP shrinkage of 1.2% and 1.3% really the most adverse scenario you can base a stress test on? Give us a break!
Source: EBA
On top of that, the threshold and the minimum requirement for the banks to have been subject of the investigation was a consolidated asset base of 30B EUR. It’s totally fine to have a certain basis to cut off the smaller banks, but would a total asset base of 30B EUR be sufficient to restore the confidence in (and on) the financial markets? We don’t think so.
One of the banks that is in a bad shape but has been excluded from the stress test is BCP. In a previous column in January of this year, we already warned for the potential collapse of this bank. The market seems to be agreeing with us now, as the company’s share price is trading 60% lower.
As of at the end of Q1, this bank had approximately 76B EUR in assets (which is below the minimum threshold for the EBA stress test), but isn’t doing great at all. On top of that, not a single Portuguese bank was included in the stress test results, but that doesn’t mean these banks are doing great at all. In fact, almost all Portuguese banks are still repairing their balance sheet, but as we have seen in the past, all it takes is just one little push against one domino, and trickle-down effect could destroy the entire banking system of the country.
But when we tried to look up BCP’s results of the stress test, we were astonished to find out the bank hadn’t been included in the press release and the list of 51 banks. This doesn’t mean the bank hasn’t been analyzed, because IT HAS! According to its own press release, BCP admits the EBA told the bank it would have flunked the stress test, with an ending capital ratio of 6.1%.
And this leads us to the next big question. How reliable and important is this stress test? Sure, ‘only’ 4 banks failed (although that actually is quite a lot, considering that’s 8% of the test sample), but first of all, 51 banks represent just a part of the entire banking system, and the collapse of three smaller players could have an even bigger effect than the contained failure of one of the bigger banks. BCP failed the test, so how many other, smaller banks are there out there that would have failed?
Secondly, the EBA chose a fully loaded CET1 capital ratio of 7% in 2018 to determine who ‘passed’ the test, and only 4 banks failed.
However, if that cutoff ratio would have been 8%, an additional 6 banks would have been on the list of failed banks, and amongst them are some that could be considered too big too fail. Deutsche Bank (surprise, surprise), Commerzbank, Unicredit and Barclays would all fail the test when one would have used a fully loaded CET1 capital ratio of 8%.
Keep in mind the EBA said this wasn’t a pass/fail test, and there’s a very good reason for this. It’s just another smokescreen to keep the superficial investors happy. But when you start to dig deeper, several more banks have failed to meet the minimum criteria.
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