The European Central Bank’s landmark review of euro-zone banks will have to ask lenders to raise an additional €51bn to be credible with markets, a Goldman Sachs survey of large institutional investors has found.
The survey of 125 institutional investors from across the globe also found that nine of the 130 banks being tested were expected to fail, with capital shortfalls most likely at Italian, German and Greek banks, according to a document circulated by Goldman Sachs on Tuesday night.
The ECB is examining whether banks have properly recognised losses in a bid to finally draw a line under doubts about euro zone lenders’ balance sheets before it becomes their supervisor on November 4. Results are expected around October 17.
Producing a result that is in line with market expectations is key for the ECB, since previous rounds of EU bank tests in 2010 and 2011 were roundly discredited for capital demands and failure rates that were far less than what investors deemed reasonable.
“The ECB is clearly perceived to have handled the process well thus far, resulting in an increase in credibility assigned to the exercise,” Goldman’s report noted, pointing out that 89 percent of investors now expect the tests to be credible, up from 70 percent in a previous Goldman survey in October.
Expectations of an “extreme” outcome that would require banks to raise over €100bn fell from 18 percent in October to 8 percent now, but investors’ average expected capital demand is now €23bn higher than in October
The €51bn investors say is needed takes account of capital that banks have already raised, including €47bn they have raised since October. The ten banks seen as most likely to fail include six that have already raised capital.
Three quarters of investors surveyed said they expected the exercise to be positive for bank valuations, with banks set to “outperform” the broader equities market once the results are announced. Euro-zone banks have traded at lower valuations than their US peers in recent years.