The focus, of course, was on Italy. When Europe’s top financial regulators released the results of a much-anticipated stress test Friday night, it was the troubled Monte dei Paschi, which had just secured a government bail-out, that came in dead last among the 51 banks evaluated.
The test, conducted by the European Central Bank and European Banking Authority, examined how the continent’s top banks would fare in a severe crisis.
Germany’s embattled leading banks, Deutsche Bank and Commerzbank, didn’t get the worst scorecard in the group. But their results were well below the average across the continent. That alone is likely to keep up the pressure on their share prices.
Overall, 51 major banks from 14 E.U. countries and Norway set out to prove to European regulators that they would survive a major recession, stock-market crash, or collapse in the euro and housing prices over the next three years. Over months, they handed over more than 100,000 pages of data to the authorities.
The clearest measure of health: A bank’s core capital ratio, a measure of its equity reserves compared to its total assets. While no bank could actually fail the test this time a round – a controversial departure from past examinations – the goal for any bank was for its capital ratio to hold above 7 percent even in the event of a crisis.
“The stress test certainly doesn't point to the danger of a systemic crisis," ”
Most European banks performed decently on that measure. The capital buffer fell on average from 12.6 percent to 9.2 percent across all the financial firms tested. Just five banks failed to reach the 7 percent threshold.
For observers, those figures highlighted that Europe’s banks, many of which have tanked in stock markets this year, are perhaps in better shape than investors believe.
“The stress test certainly doesn’t point to the danger of a systemic crisis,” Isabel Schnabel, a top economic advisor to the German government.
All German banks tested stayed above the 7-percent mark. Germany’s two largest banks, however, did pretty poorly. Commerzbank would survive a crisis with a capital ratio of 7.4 percent, Deutsche Bank with 7.8 percent. The remaining German banks in the test all performed above the European average, including state-backed Landesbank Baden-Württemberg and Landesbank Hessen-Thüringen, the savings bank services group Dekabank and Volkswagen Financial Services.
John Cryan, Deutsche Bank’s chief executive, did his best to put a positive spin on the results, in a statement noting the bank’s reserves have actually improved compared to the last time the ECB and EBA conducted a stress test back in 2014.
“We come out of the 2016 stress test stronger than in 2014, although this year’s exercise was more demanding,” Mr. Cryan said. “This improved result is the fruit of hard work and many small steps forward. The stress test shows that the bank is well equipped for tough times.”
Mr. Cryan does have some reason to be pleased. For the first time, this year’s stress test included legal risks, something Germany’s largest bank has struggled with perhaps more than any other European firm, paying out more than €10 billion in legal settlements and regulatory fines since the 2008 crisis.
Both Deutsche Bank and Commerzbank have suffered mightily over the past few months, with investors increasingly doubting they have what it takes over the long haul and sending their share prices to record lows. Deutsche Bank barely recorded a profit in quarterly results released earlier this week.
The gap is especially severe compared to trans-Atlantic rivals, noted Klaus Fleischer, a finance professor with the University of Applied Sciences in Munich. While the two banks may not be facing imminent collapse, it is time for Berlin to start worrying about the effect their struggles could have on lending in Europe’s largest economy, he warned in an interview with Handelsblatt Global Edition.
Overall, some of Europe’s very largest banks performed the most poorly in the test. Italy’s largest bank Unicredit barely beat the symbolic threshold with a capital ratio of 7.1 percent. Britain’s Barclays survived with reserves of just 7.3 percent.
The European Banking Authority itself has also warned that the battle to make the continent’s banks fit for the long haul is only half finished. Even if most aren’t in danger of an immediate collapse, that doesn’t mean they’re profitable, either.
Christopher Cermak is an editor covering finance and economics for Handelsblatt Global Edition in Berlin. Yasmin Osman covers banking regulation for Handelsblatt in Frankfurt. Katharina Slodczyk of Handelsblatt in London also contributed to this story. To contact the authors: firstname.lastname@example.org and email@example.com