5 things you need to know about the ECB stress test before markets open
European stress tests should help put banking worries to bed
1. The main headline from the ECB stress tests is that 25 banks need to raise about €25 billion. That’s a trifling number compared to €22 trillion on European bank balance sheets and it’s whittled down even further because the ECB said 12 of them have already raised the necessary fund. Another 2 Greek banks that failed are exempted as well because repair plans are already in progress. So that’s really only 11 failures and the total shortfall is miniscule €7 billion.
2. All the names on the list are the familiar basket cases including Monte Paschi, which has the largest single capital shortfall at €2.1 billion. There was some worry about Banco Popular, Commerzbank and Bankia that will be soothed.
3. Italy is the main loser in the exercise but even there it’s not bad. Using the end-2013 date, 9 banks failed but when measures since then are taken into account, that falls to just two banks. There’s some talk of weakness in Italian govt debt early in the week and that will be a main metric to watch as a leading-indicator of overall sentiment. The ECB’s Constancio said all the money will be raised privately.
4. A main negative headline is that banks will have to lower asset valuations by €48 billion because more loans were reclassified as non-performing. That raises some questions about governance at European banks.
5. Credibility is the big question and I think the market has to give the ECB the benefit of the doubt. On Monday, however, keep a close eye on individual European bank shares. There is a treasure trove of information here and bank analysts will be combing through it and could find some red flags.