EU stress tests were released tonight. The tests estimated how well a bank’s capital would stand up to a one-dimensional economic shock in 2018. The modeled stress is more substantial than a run-of-the-mill recession, but not by much. There were few surprises in the results. However:
- Monte dei Paschi, the third largest bank in Italy and the only bank in Europe likely to be wiped out by the moderate economic shock modeled in the tests, announced a rescue package in which it will sell €9 billion in bad business loans while adding new capital. The small size of the rescue plan suggests that the bank may need a new rescue next year.
- Italy, Spain, and Ireland were the only countries that fared poorly in the tests. The top two banks in Ireland did well enough that they can continue to repay past bailout funds.
- Banco Popular, the sixth largest bank in Spain, fired its top executive before the test results were released to the public.
- RBS, with the most problematic result in Britain, said its test results showed progress on its rebuilding plan.
Sentenced: Three former executives in Ireland, two at Anglo Irish Bank and the other at Irish Life and Permanent, were sentenced for a scheme to create €7.2 billion in phantom deposits on the bank’s balance sheet. Each was sentenced to between 2 and 3.5 years. The purpose of the scheme was to make the bank appear financially sound when in fact it was on the edge of insolvency.