European Bank of Italy on the 2016 test results of stress-depth Note
The stress test results were released today major European banks, including the top five Italian (UniCredit, Intesa Sanpaolo, Banca Monte dei Paschi di Siena, Banco Popolare and UBI Banca). The exercise was coordinated by the European Banking Authority (EBA), in cooperation with the ECB and the national supervisory authorities. It is a heavy duty service, which assesses the resilience of European banks in adverse economic and financial conditions, with low probability of realization.
Stress tests have come for years to be part of the instruments used by the banking supervisory authorities. They can be used to quantify the immediate needs of capital strengthening. On the contrary, in this case the results will be used to provide useful information to the Supervisory Board for the purpose of ordinary supervisory activities.
The methodology of the stress test exercises can vary greatly between countries and over time: the comparison between exercises carried out by other authorities or in different years must be made with caution.
the exercise now conducted is particularly heavy, both for the length of the time period in question – a three-year, well above to what was done in similar exercises in the US – and for some important methodological assumptions.
the features of the year
– Unlike the exercise-Depth Evaluation (Comprehensive Assessment) of 2014, the stress test this year is not the type “pass / fail”, because it does not establish a minimum capital to be met by immediate capital strengthening measures. The results represent, with no automatic modes, one of the elements for the quantification of the capital, second pillar (Pillar 2), in response to the review process and prudential supervision (Supervisory Review and Evaluation Process, SREP). Decisions on the outcomes of the SREP will be formally adopted at the end of 2016 and will become operational from the beginning of 2017.
– The stress test assumed for each country two scenarios: a baseline (baseline), taken from forecasts the European Commission made in autumn 2015, and one against (adverse). The simulation was carried out starting from the financial statements of banks by the end of 2015.
Data – In the adverse scenario, the outlook for Italy a fall in real GDP in the period 2016-18 by almost six percentage points compared to the baseline scenario forecasts. In 2018 the product level would be about 10 percentage points lower than that observed at the beginning of the financial crisis (2007); it would be an unprecedented loss by the last war. The adverse scenario also assumes an increase in the period of performance of Italian government bonds in the long term by about 100 basis points, which would result in a devaluation of 12 per cent of these securities.
– Despite the severity of ‘ exercise and the strains of the last years, four of the five major Italian banks included in the EBA sample showing a good seal. For these banks (UniCredit, Intesa Sanpaolo, Banco Popolare and UBI Banca) the weighted impact on capital (CET1) arising from the adverse scenario amounts to 3.2 percentage points compared with 3.8 percent of the average of the EBA sample. Also including the Monte dei Paschi, the impact would be, in weighted terms, of 4.1 percentage points.
– The Monte dei Paschi di Siena, which passes the test in the baseline scenario, the scenario shows against a negative result. The conditions of the Monte dei Paschi di Siena have long attention SSM. Since November 2013, the Group is subject to a restructuring plan approved by the European Commission, still in progress, during which were achieved remarkable results, in terms of organization and rationalization of fee reductions.
– About half of the overall reduction of registered capital from Monte dei Paschi is attributable to the decrease in net interest income; the rest was due to the increase in capital deductions and credit losses and write-downs on government bonds held in the AFS portfolio. Two thirds of the impact on the income statement is due to the reduction in net interest income. In particular, the magnitude of the shock idiosyncratic (equal to 220 basis points), commensurate with the departure of the bank rating (B-), is far superior to that provided by banks with the best rating (25 basis points for banks AAA) credit rating, especially if you consider that this shock is to take effect for three consecutive years.
– the Monte dei Paschi’s Board of Directors today approved a plan that calls for the sale of the entire portfolio of bad loans and a capital increase of up to 5 billion, which will significantly increase the allocations on remaining impaired loans. As a result of this transaction, the bank will hold non-performing loans – but not in pain – in line with the average values of the Italian banking system. The bank’s regulatory capital will remain at current levels and profitability may be affected by improvements both in terms of funding costs and credit and on that of the asset yield and liquidity.
(AM)
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