Italian banks’ capital hole exposed by European financial stress test

The struggling Monte dei Paschi di Siena must raise €2.1bn

Italian banks must launch a fundraising drive as a result of the European authorities’ landmark assessment of the health of the Continent’s financial sector.

The review – led by the European Central Bank and in conjunction with the European Banking Authority – yesterday found that 25 institutions across the Continent, including nine lenders in Italy, had an aggregate capital shortfall of €25bn (£20bn). It said that while some lenders had already taken the necessary action to raise their capital buffers, 14 needed to do more. Four are in Italy, the home country of the ECB’s president, Mario Draghi.

The struggling Monte dei Paschi di Siena has the biggest shortfall and must raise €2.1bn. Portugal’s Banco Comercial has been told to increase its capital by €1.15bn. There are two lenders from Belgium and two from Slovenia on the list.

Over the next two weeks this delinquent group of lenders need to put forward plans to increase their equity cushions by a total of €9.52bn. And they will need to fill the gap over the next nine months. No French or German banks were identified as needing to raise more capital. All of the UK’s banks were also given the all-clear. Daniele Nouy, head of the ECB Supervisory Board, said the affected banks would be expected to raise the capital “primarily from private sources”.

The exercise is the latest attempt by the European authorities to restore market confidence in the Continent’s battered banking sector. Three previous stress tests by the European Banking Authority since 2009 have failed to do so. European policymakers are also hoping that the exercise will encourage banks to supply more credit to a eurozone economy that is in danger of slipping back into recession.

The vice-president of the ECB, Vitor Constancio, praised the assessment of 130 European lenders as “rigorous” and predicted that it would boost confidence in the banking sector. But some analysts expressed reservations. Colin Brereton of PricewaterhouseCoopers said there was still a question-mark over whether European banks would be able to cover the cost of their capital. “The point where many of Europe’s banks will be able to satisfy this long-term viability test is still a way off due to the prospect of continued weak economic conditions and low interest rates across Europe,” he said.

Erik Nielsen of Unicredit added that it was “extremely unlikely” that the assessment would boost eurozone lending. “By far the greatest share of the ‘lending problem’ is a demand problem,” he said. “Thinking that lending somehow can lead GDP is an illusion.”

As well as a stress test designed to show how banks would cope in the event of new economic shocks, the year-long exercise included a review of the loans on their balance sheets. The ECB said yesterday that banks were collectively overvaluing their assets by €48bn at the end of 2013.