There are still three days left until the final results of the European Central Bank’s toughest-ever look into the health of Europe’s largest banks, but one thing is already clear: What the ECB had desperately tried to avert has already happened. Speculation is running wild and there is growing unrest in the financial markets.
The ECB has insisted that any leaks of the results at this point are highly speculative – the final results will be released on Sunday. That did not stop investors from starting to make bets on Wednesday as reports emerged that as many as 11 banks may have failed, mostly in southern Europe. Handelsblatt sources said the 24 German banks participating in the ECB’s test will not be required to raise additional funds.
A failing grade means banks do not have enough capital in reserve to withstand another financial crisis. Those banks will be required to raise additional funds on the open market to guard against the risk of their loan books turning sour. The question of exactly how much each failing bank will have to raise has also been the subject of speculation this week. Markets have estimated that about €50 billion ($63.3 billion) will be needed in total.
Leaks are emerging because the 130 banks that participated in the test have already received “preliminary” results during talks with the ECB that started last month. While banks were only getting a look at the final preliminary results on Thursday – and the ECB insists the results aren’t legal until its Governing Council signs off on Sunday morning – most experts believe the answers will not change significantly between now and Sunday.
Handelsblatt sources in the industry suggest that German banks can breathe easy. The 24 domestic lenders that participated in the stress test have all passed without any significant blemishes, including four banks that had been in danger of failing. While one or two could technically fail, because they raised fresh funds after an ECB deadline, it seems clear today that none of these banks will have to close any capital gaps in the next six to nine months.
The situation is more critical in other European countries. According to one source, the number of banks that have failed is in the high single-digit or low double-digit range. These banks apparently have a capital deficit that they will be required to fill in the next six to nine months.
Market turmoil began Wednesday when Spain's Efe news agency, citing sources in financial circles, reported that at least 11 banks had failed the stress test.
The ECB will provide the banks with its preliminary final results at noon on Thursday. The institutions are then expected to confirm the results within 48 hours. Even then, the ECB insists the results are not absolutely final – its Governing Council will approve the final version only on Sunday.
Market turmoil began Wednesday when Spain’s Efe news agency, citing sources in financial circles, reported that at least 11 banks had failed the stress test, including three banks from Greece, two from Italy, two from Austria, one each from Cyprus and Portugal, and possibly a Belgian bank. According to the report, no German banks failed the test.
Shares of some of the publicly-traded banks came under strong pressure. Shares in Greece’s Piraeus Bank dropped by almost 4 percent, Eurobank Ergasias, the country’s third-largest bank, lost 2.1 percent and Italy’s Banco Popolare also dropped by 2 percent. Others that escaped the negative speculation saw strong gains, such as the Italian banks Monte dei Paschi Bank, which saw a 4-percent gain in share value, and Banco Popolare di Milano, up 7.4 percent.
The share price swings came as investors and banks tried to weigh up the leaked reports, confirm their accuracy and rate how damaging they are for the European financial system and the individual banks.
If 11 is truly the number of banks that failed the test – according to other sources, the number could even be in the single digits – it would be a good outcome. As Handelsblatt has learned from financial sources, the stress test will in fact yield “no negative surprises.”
“The Black Monday many financial market players had feared will not materialize,” one source said.
Above all Monte dei Paschi di Siena has long counted as one of the banks likely to fail. If you believe Italian media reports, the question is not whether they will fail but exactly how much additional capital they will be required to raise. Austrian financial services provider Erste Group by contrast felt the need to promptly announce that it assumed, after speaking with regulators, that it had passed the test.
Greece’s finance minister, Gikas Hardouvelis, has also tried to ease concerns, telling reporters earlier this week that he expected no big surprises and that banks that will need additional capital can acquire this relatively easily on the open market. There is also €11.5 billion remaining in an E.U.-bailout fund for Greek banks.
Even German lender HSH Nordbank, considered the shakiest German candidate because of its large inventory of troubled shipping loans, stands a good chance of passing the stress test. Especially critical for HSH were the government guarantees issued by its two owners, the states of Hamburg and Schleswig-Holstein, which increased their guarantees by €3 billion to a total of €10 billion in 2013.
“You can’t rule out that Deutsche Bank will fail the stress test when excluding the capital they raised this year.”
So far, the European Commission has given this government measure its preliminary approval, but it is still deciding whether to treat the increase in the guarantee as government assistance or as capital for the bank. This is why banking regulators were long hesitant over whether to recognize the €3 billion in their test. According to conversations between HSH management and regulators, there are indications that the bank can now breathe a sigh of relief on this point, according to financial sources.
There was also some speculation over Germany’s biggest bank, Deutsche Bank. A number of analysts warned that the Frankfurt-based lender could technically fail the test. This is because the ECB had set December 31, 2013 as the cutoff date for its bank checkup. Deutsche Bank, however, had increased its capital by €8.5 billion in May 2014.
“You can’t rule out that Deutsche Bank will fail the stress test when excluding the capital they raised this year,” said Guido Hoymann, an analyst at Bankhaus Metzler in Frankfurt.
Either way, the bank has already covered any possible capital gaps that would have occurred in the ECB’s simulation of a serious economic crisis. However, as Handelsblatt has learned from financial sources, preliminary results show that the top dog in the German banking sector has also passed the test.
Only the southern lender Münchener Hyp may have technically failed the test. The bank had a capital ratio of just 6.3 per cent on December 31, 2013, below the 8 percent required by the ECB. The bank has since made up the shortfall with a €400 million capital increase over the summer.
From the ECB’s standpoint, the stress test has already fulfilled at least part of its function, in that banks have significantly improved their capitalization since last summer. Banks have improved their capital ratios by more than €200 billion since the middle of 2012. According to ECB calculations, the lenders among other things have issued €60 billion in shares, retained €26 billion in profits and sold off €18.3 billion in bad assets.
Jens Münchrath heads economic and monetary coverage out of Düsseldorf and Yasmin Osman covers banking supervision out of Frankfurt. Laura de la Motte, Gerd Höhler, Robert Landgraf, Michael Maisch and Christopher Cermak also contributed to this story. To contact the authors: firstname.lastname@example.org and Osman@handelsblatt.com