The EU banking stress test released late Friday was better than feared and should - at least in the short term - reduce tail risk. We do not expect the result of the stress test to be a major game changer. Hence, we expect only a small positive market impact today as some market concerns about the 'true state' of the European banking sector are set to prevail.
The EBA reports that on an aggregate level the 51 banks included had a CET1 ratio of 13.2% at the end of 2015. This is a significant improvement of the capital base and 200bp higher than in the sample in 2014 and 400bp higher than in 2011 stress test. There are no banks 'failing' or 'passing' since the stress test will not judge banks against a single capital threshold.
Ahead of the stress-test results focus was on the fragility of the Italian banking sector. Monte dei Paschi di Siena was the worst performer in the test with a CET1 capital (fully loaded) ratio dropping to a negative 2.4% in the adverse scenario. However, the bank announced a restructuring plan before the test results were published, which should lighten the sentiment on Italian banks despite some uncertainty about the execution risk.
The German banks' vulnerability was at the centre of attention in the beginning of the year but all banks in the stress test showed a CET1 (fully loaded) capital level close to or above 8% in the adverse scenario. Ireland showed the weakest result with a CET1 ratio (fully loaded) of 5.21% in the adverse scenario. Note though, that the legacy from the government support is penalising Ireland in this scenario despite the new regulation not coming into effect until 2022.
The ECB published a statement following the release of the stress test and concluded that overall supervisory capital expectations will remain broadly stable compared to 2015.
To read the entire report Please click on the pdf File Below