It is said that those who fail to learn the lessons of history are doomed to repeat them. At the height of the Global Financial Crisis, nations around the world felt obliged to pump public money into certain, critical banks to ensure that they didn’t fail, fearing that the cost of allowing these financial institutes to fail, directly and via secondary effects, could be much greater than keeping them afloat. Some of these institutions were deemed “too big to fail” with analysts concerned that the integrity of the global financial system could unravel, with devastating consequences, were they to go to the wall.
In order to ensure that the public (and indeed, the public purse) was protected against a potential future run on bank within the Eurozone, the European Banking Authority (EBA) has conducted a series of so-called stress tests which are designed to simulate a future banking crisis and analyse whether or not the bank under test would survive.
The most recent stress test involved 123 Eurozone banks and 24 – roughly 1 in 5 – was deemed to have failed. The tests were conducted towards the end of last year and the banks found wanting now have nine months to get their houses in order or risk being shut down.
Ten of the banks identified as vulnerable have already taken action to improve their balance sheets. The remaining banks comprise financial institutes in Italy (4), Greece (2), Belgium (2), Ireland, Austria, Cyprus, Portugal and Slovenia (2).
An Italian bank, Monte dei Paschi, was identified as having a potential shortfall of €2.1 billion under the EBA test. The upshot of this saw 21.5% wiped off its share value (despite trading in the bank’s share being suspended twice). The bank was founded in 1472 and will now have nine months to beef-up its balance sheet or risk being wound-up.