MILAN (AP) — Italy's Monte dei Paschi di Siena was by far the worst performer in a stress test of EU banks, which otherwise on Friday found the region's top lenders to be in relatively good shape. But the troubled bank sought to get ahead of the poor result with the announcement of a 5 billion euro ($5.6 billion) capital increase.
The money injection from private sources avoids a potentially painful bailout for the Italian bank that under EU rules would have imposed losses on creditors like bondholders, many of which are small savers in Italy.
The Italian treasury said in a statement it was satisfied with the deal that would ease the bank's bad loan burden and allow it to create a business plan to support the real economy with credit to businesses and families.
The EU-wide stress tests showed that most of the 51 European banks that were scrutinized were strong enough to withstand a sharp drop in the economy and markets. Beyond Monte dei Paschi, Ireland's Allied Irish Bank and Austria's Raiffeisen proved to be the weakest financially.
Monte dei Paschi is among the most troubled of Italy's banks, which include smaller ones not covered by Friday's stress tests, and are struggling with 360 billion euros ($400 billion) in soured loans.
Fixing the banks is crucial for Italy and the wider eurozone because financially weak banks are more reluctant to lend out money to households and businesses, stifling the potential for economic growth needed to create jobs.
Also, saving banks has in the past overwhelmed some eurozone states' public finances, such as Ireland in 2010. With Italy ranking as the third-largest eurozone economy, any crisis of confidence over the state's financial health has the potential to rekindle concerns about the overall currency's integrity.
The CEO of Monte dei Paschi, Fabrizio Viola, said that the bank would assess in the coming months whether the need for the capital increase would be less than the 5 billion euros currently fixed. It expects to have a new business plan by September.
The board is expected to approve the capital increase in the fall with the deal expected to conclude by the end of the year. Viola said he expected the deal would free management to be "more focused on the business, when they were very focused on managing the big legacy we had in the financial and credit portfolio."
"We think this transaction can give an upside to shareholders," he said.
The stress test was carried out by the European Banking Authority and simulated how 51 of the EU's biggest institutions would fare if the EU economy fared 7.1 percent worse than expected through 2018.
While there was no pass or fail grade, the results showed the financial strength of each bank under the stress scenario. The EBA concluded that thanks to significant efforts to raise capital in recent years, the EU banking system was resilient as a whole, though it noted that the individual performance of banks varied significantly.
The test's measure of a bank's financial health was the common equity tier 1 ratio — that is, the amount of easily accessible capital as a percentage of overall assets. A healthy bank usually has a ratio above 6 or 7 percent.
Under the stress scenario, Monte dei Paschi's fell to minus 2 percent. Allied Irish's fell to 4.3 percent. Other banks with relatively weak levels were Spain's Banco Popular, Austria's Raiffeisen and Bank of Ireland. Italy's biggest bank, UniCredit, was also among the weaker results, with a ratio of 7.1 percent.
Concern over Europe's banks has grown since Britain's vote to leave the European Union has increased market jitters. In particular, the potential economic impact of a British exit suggests central banks will keep interest rates lower for longer — something that weighs heavily on the earnings of banks, which rely on higher rates to make money when lending.
Piovano reported from London.