Italy Banks Able to Fill Potential Capital Gap, ABI Says

Italian banks, which have raised money, sold assets and curbed risks to boost capital, can manage any shortfall of reserves resulting from the scrutiny of their assets, the head of the banking association said.

“Even if some shortfall of capital will emerge, thanks to the favorable environment in the financial markets this shortfall could be repleted by market operations without major problems,” Giovanni Sabatini, general manager of the Italian Banking Association, said in a Bloomberg Television interview in Rome. “The reaction of the financial markets to the recent capital increases launched by Italian banks” shows the positive mood of investors, he said.

The assets of 15 Italian lenders, including UniCredit SpA, Intesa Sanpaolo SpA and Banca Monte dei Paschi di Siena SpA, are being reviewed by the European Central Bank as part of a comprehensive assessment before it takes over banking supervision for the euro area in November. Eight of the lenders are raising a total of more than 10 billion euros ($13.6 billion) this year through rights offers, benefiting from renewed confidence as Italy emerges from the deepest recession since World War II.

“Since the beginning of this exercise, Italian banks have approached the asset quality review with a strong commitment,” said Sabatini. “They are prepared. They have increased their provisioning, they have reviewed their credit portfolios, and also increased their capital.”

No Major Gap

“I don’t expect a major shortfall of capital will emerge from the asset quality review,” or from the stress tests, Sabatini said.

In the asset quality review, the ECB is assessing banks’ balance sheets to make sure they are recognizing bad loans, provisioning sufficiently and holding enough capital. The stress test evaluates whether lenders can survive a downturn.

“There is still a great deal of uncertainty on how the stress tests will be carried out, particularly how it will work the link between the asset quality review results and the stress testing,” Sabatini said. “There are also issues related to the risk that there are leakages of information and interaction with market-abuse directives and the obligations to disclose immediately price-sensitive information.”

The exam conducted by the ECB in cooperation with the European Banking Authority will test how well banks can withstand an economic crisis that is the bleakest scenario ever simulated by European regulators. The ECB has set a required a capital-to-risk-weighted-assets ratio of 8 percent for its asset quality review and 5.5 percent for the subsequent stress test. Results are scheduled to be delivered in October.

Lending Program

The ECB program to boost banks’ lending to companies is a “very positive step,” according to the lobby, though demand for credit may take some time to recover. “We have to take into account that, for the time being, the demand for credit is still very weak, particularly demand for credit to finance new investments,” said Sabatini.

The targeted loans program is a central part of Draghi’s latest policy package aimed at supporting the euro area’s fledgling recovery. The plan’s complex design allows banks to roll over previous long-term loans for two years, while rewarding those who increase credit supply to the real economy with more cheap money until 2018.

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