Oct 27, 2014 9:32 AM

Test hits Italian banks, but also some German ones

The Associated Press

FRANKFURT, Germany (AP) Italian bank shares were hit hard on Monday as investors got their first chance to react to the results of Europe's far-reaching review of banks, which mainly flunked a few smaller financial groups in economically weaker countries.

But as traders sifted through the masses of data, the test also raised questions about several banks in Germany. Though they passed the main test whose results were published Sunday, they fell short on a tougher measure of financial strength that will apply in coming years.

A key index of banking stocks, the Stoxx Europe 600 Banks, fell 1.47 percent in early afternoon trading amid generally falling shares.

Overall, the test found Europe's big banks had strong enough finances to weather a sharp economic downturn scenario. The test, conducted by the European Central Bank and the European Banking Authority, first checked the value of bank loans and holdings. Then their finances were subjected to a stress test to simulate how their finances would hold up in a downturn.

Many banks increased their financial buffers ahead of the test, knowing it was coming. As a result, 12 of the 25 had already covered their financial gaps found by the ECB, and several of the remaining 12 had only small amounts to raise.

The test is a prelude to the ECB formally taking over as the main banking supervisor for the countries that use the euro.

Here are the key takeaways from the banking review and the market reaction.


Shares in Italian bank Monte dei Paschi di Siena sagged 18 percent before they were suspended from trading. It had the biggest capital shortfall, 2.11 billion euros ($2.67 billion). The bank's board met Sunday and said it had hired advisers to "explore all strategic alternatives." That could include a share issue, which tends to hurt the share price because it dilutes its value.

Others that needed much smaller amounts of capital were Banca Carige, Banca Popolare di Milano, and Banca Popolare di Vicenza.

The results raised questions about how tough Italy's central bank has been as an overseer. "This puts a cloud above the Bank of Italy's reputation as a supervisor," analyst Nicolas Veron of the Bruegel think tank in Brussels wrote in an analysis.


Germany's biggest banks, Deutsche Bank and Commerzbank, passed the tests. But several smaller ones Germany's HSH Nordbank, DZ Bank and WGZ Bank passed the basic test, but fell short on a tougher measure of capital adequacy that will be phased in in coming years under an international agreement called Basel III.

HSH Nordbank, which is jointly majority owned by the city of Hamburg and the region of Schleswig Holstein, has specialized in ship finance, a business hard hit by losses and bad loans. The bank remains in compliance with current capital rules.

CEO Constantin von Oesterreich said in a statement that the test "confirmed that HSH Nordbank has a solid capital base in the present setting."

But analyst Veron called the results for the three smaller German banks "possibly the biggest surprise" of the entire test.

He added that "the fact that Germany and Italy, two of the euro area's biggest countries, are not immune to the ECB's inquisitiveness suggests that the assessment has been kept reasonably independent from political pressure."


Whether it was thorough enough or not, the review of banks is only part of a bigger range of actions that are needed to get the 18-country eurozone economy going, experts say.

The aim of the test was to force weak banks to improve their financial strength so they can lend to businesses, which would invest and hire more.

But even ECB officials admitted that will only happen when demand picks up.

"Although likely to improve credit supply, a large number of credit demand constraints will remain in place until other factors hampering eurozone growth are addressed," wrote analysts Mujtaba Rachman and Federico Santi at the Eurasia Group.

The latest indicators suggested that an upturn isn't happening yet. Germany's Ifo index of business confidence fell in October for a sixth consecutive month underscored the problem on Monday.


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