Wednesday, 10 August 2016

Big European Banks Try to Block Contagion from Italian Banking Crisis (Before it Sinks them)

Europe has plenty of reasons to be worried these days, but none more so than the seemingly terminal decline of the old continent’s banking system. So fragile are Europe’s banks that they can’t even get through an ECB stress test — whose primary purpose is to restore confidence in Europe’s banking system, by ignoring two of the most insolvent national banking sectors (Greece and Portugal) as well as the main source of stress (negative interest rates) — without sparking a panicked sell-off.

Before the test, UK-based Barclays predicted that any bank found to have a core capital ratio of less than 7.5% would come under pressure. There was no shortage of candidates, including, ironically, Barclays itself, which made it through the stress scenario with a core capital ratio of just 7.3%. The bank’s shares have fallen by about 5% since Monday.

Barclays is no small-time institution; it is the UK’s second largest bank by assets and a member of the select club of global systemically important financial institutions: it’s too big to fail. So, too, is Deutsche Bank, which in the test was the 10th riskiest out of 51 on core capital and whose shares have tumbled 60% since May. Credit Suisse, another systemically important institution, has lost close to two-thirds of its market value in the last year while Italy’s Unicredit, another too-big-to-failer, has shed roughly the same amount since the start of 2016.

The market capitalization of Deutsche and Credit Suisse has shrunk so much that they just suffered the ignominy of being ejected from the Euro Stoxx 50, a stock index designed by Deutsche Börse Group that comprises Europe’s 50 largest and most liquid stocks.

Meanwhile, things have gotten so bad at Italy’s third biggest bank, Monte dei Paschi, that it was just removed from the Euro Stoxx 600 after getting top honors in the ECB’s stress test. Under a stress scenario its Common Equity Tier 1 (CET1) slumps to negative 2.44%. In other words, the world’s oldest bank is not just insolvent in an adverse scenario; it’s insolvent right now.

This realization prompted yet another stampede out of Italy’s banking equities. On Thursday, Italy’s government responded by issuing blanket denials in an almost slapstick attempt at damage control.

Italy’s banks are “not in crisis” and pose “no systemic threat”, the country’s EconMin, Pier Carlo Padoan, breezily informed the country’s parliament.

[Posted at the SpookyWeather blog, August 10th, 2016.]

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