The European Central Bank and European Banking authorities will release today the results of the 2016 EU-wide bank stress tests. Bank stocks across Europe have reached record lows as capital and funding pressures remain. Italian banks, which are reported to have €360 billion ($395 billion) of bad loans on their balance sheets will receive special attention as will German banking giant Deutsche Bank AG, which has been selling off assets to reach capital requirements. The bank test results are due at 4pm EST. (See also: The EU Banking Crisis Is Here.)

How the Test Is Done

The tests include 51 banks covering 70% of total banking assets across the EU. The tests put banks under a number of scenarios and analyze how the banks' capital holds up under each of the scenarios. These scenarios for systemic risks are:

  • a sharp rise in global bond yields 
  • assessing profitability in a low growth environment
  • rising debt in both the public and private sector in a time of tepid growth
  • the stress in the shadow banking system

Brexit's Impact

The results of the U.K.'s decision to leave the EU will not factor into the results, however the projected slowing growth in Europe will be during future tests as economic costs of the Brexit decision become clearer. The ECB says, "Although no singular event such as Brexit is assumed, the projections for the gross domestic product (GDP) of the euro area under the adverse scenario are more severe for every year of the stress test horizon than the negative effect on GDP growth foreseen by analysts as a result of Brexit." (See also: The ECB Cuts Rates, Boosts Stimulus.)

The Results

There is no specific pass or fail. However, the results are used as part of a wider look into the health of the banking sector. These results will make up a significant part of the 2016 Supervisory Review and Evaluation Process (SREP) report. The report, which is due later this year includes two parts; requirements and guidance. 

Bank Share Prices

The fall in many European banks is unprecedented as the latest stress tests were conducted. Here is a look at some of the major movers:

  • Monte dei Paschi: of all the demises, even this is considered an outlier. The oldest bank in the world and third biggest in Italy was trading above €100 pre 2008 financial crisis. The share price is now below €0.5. 
  • Deutsche Bank has seen its share price tumble in 2016 as the banking sector struggles with profitability in the low rate environment. Deutsche Bank has had its own specific issues with capital requirements and in early July its share price traded below $13, an all-time low. Shares in Deutsche Bank began 2016 at $24 and prior to the 2008 crisis were above $130. 
  • The Stoxx 600 European Banking Index, which encapsulates a broader picture of the European banking sector is down 22% year-to-date

The Bottom Line

Markets are bracing themselves for the worst. The European debt crisis, which began over five years ago created long-term systemic risks for banks which are showing no signs of letting up. Shares in all European banks continue to lag at a time when U.S. indexes are making all-time highs and today could reveal just how deep of a hole banks are and how capable they are to deal with any adverse affects that may arise. 

 

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