by Mish

The ECB’s stress tests published on Friday showed Monte dei Paschi has a huge capital shortfall, with the bank’s Common Equity Tier 1 (CET1) ratio of negative2.44 percent.

Forget the adverse scenario bit, Monte dei Paschi, Italy’s third largest bank and oldest bank in the world is insolvent in any realistic scenario.

On ZeroHedge provided the Full Details Behind Monte Paschi’s €5 Billion Bail Out but the short synopsis is the same as ever: It cannot possibly work.

Supposedly, a €1.6 billion investment into a mezzanine tranche of Monte dei Paschi from the €5 billion Atlante (Atlas) rescue fund is all it takes to cure some €50 billion in nonperforming loans at the bank.

In total, the Italian banking system has €360 billion in nonperforming loans and Atlas is supposed to take care of the entire mess.

Monte dei Paschi Rescue Hits Bank Shares

Yesterday the Financial Times reported Monte dei Paschi Rescue Hits Bank Shares.

Shares in UniCredit, Italy’s largest bank by assets, tumbled 9 per cent on Monday after the terms of a rescue plan for Monte dei Paschi di Siena suggested that other Italian banks might have to raise more capital.
Under the MPS rescue plan, the Tuscan bank will shift its entire bad loan portfolio of €27.7bn into a securitisation vehicle, priced at 33 cents on the euro.
[How that got to €27.7bn from €50bn is a mystery but these numbers have been bouncing all over the place week to week. Yesterday the FT reported “The rescue is intended to put Monte dei Paschi’s long-running capital concerns behind it. In a two-pronged operation the bank’s €50bn of gross non-performing loans will be moved into a special-purpose vehicle to be securitised for sale.]
People are looking at MPS and saying if that’s the new fair value, then we’re going to need to see capital raises from other domestic banks we thought were safe, even though they ‘passed’ the stress test.
“This is a Monte specific solution and it doesn’t address the sector as a whole . . . it will use the remaining capital in the Atlante fund,” said Rahul Kalia, an investment manager at Aberdeen Asset Management.
[I don’t believe it addresses anything. The market seems to agree].
Lorenzo Codogno, founder of LC Macro Advisors and former chief economist at the Italian Treasury, said: “This first jumbo operation is likely to jump-start a market for NPLs [non-performing loans] in Italy which can become extremely useful in addressing the broader problems”. It could be replicated across Italy’s banking system, he says.

Confidence Shell Game

Instead, debt was repriced lower across the board and more write downs are feared.

Monte dei Paschi Down 99.72% Since May 2007 High

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It’s not just Monte dei Paschi, or even just Italian banks.

BNP Paribas Daily Chart

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BNP Paribas, a French multinational bank is a certified all star compared to German banks.

Deutsche Bank Daily Chart

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Deutsche Bank Monthly Chart

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What About Commerzbank?

May 1, 2016: Commerzbank Looks to Build on Gains of Recent Years

July 25, 2016: Commerzbank Warns of Decline in Capital Position

In an unscheduled announcement, Germany’s second-largest bank by assets said that its core tier one capital ratio — a key measure of financial strength — had fallen from 12 per cent at the end of March to 11.5 per cent at the end of June.
That is still above regulators’ minimum requirements — but diverges from the 12 per cent that analysts had been expecting, which triggered the impromptu disclosure under Germany’s strict securities laws.

Commerzbank Daily Chart

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Commerzbank Monthly

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Race to Zero

I am sure glad “Commerzbank Looks to Build on Gains of Recent Years”.

Are they talking about gains in the race to zero?

If so, percentage-wise Commerzbank is ahead of Deutsche Bank but behind Monte dei Paschi. The last final plunge takes considerable effort however. Monte dei Paschi remains the overwhelming odds-on favorite.

The Financial Times discusses the Vanishing Market Value of European Banks.

“The key to us is understanding this is a profitability issue versus an insolvency issue,” says Hani Redha, a portfolio manager at PineBridge Investments, regarding the sector’s performance.”

I suggest (as does the market) the entire European banking system is on the verge of collapse.

Mike “Mish” Shedlock

Run on Italy’s Third Largest Bank? Capital Controls or Bail-Ins Next? Why Take Chances?

Italian Bank Customers Pull Deposits. The CEO of Monte dei Paschi, Italy’s third largest bank, and the oldest surviving bank in the world, admits Customers Pulling Deposits as share prices sink.

Italy’s Zombie Banks on Death Bed, Bail-Ins Coming?

Italy’s third largest bank by assets, Banca Monte dei Paschi is on the death bead. It’s been there since mid-2014.

European Bloodbath Spills Over to US Markets: Deutsche Bank CoCo Bonds Collapse.

A bloodbath that started in Europe quickly spilled over into the the US markets today. European bank shares were especially hard hit with Deutsche Bank leading the way.

Bail-In Coming for 40,000 Junior Bondholders of Monte dei Paschi: Expect More Bank Bail-Ins

Approximately 40,000 junior bondholders are about to take a huge hit as a last-gasp private rescue plan for Monte dei Paschi, the world’s oldest bank looks set to fail.

ECB Discovers Monte dei Paschi Shortfall Bigger Than Expected

This past month, the world’s oldest bank, Monte dei Paschi, struggled then failed to raise €5 billion capital. That failure triggered a €20 billion recapitalization effort by the Italian government.

Eight Italian Banks to Fail: Renzi Seeks Scapegoat

The Financial Times says “Up to eight lenders risk being wound up if No vote triggers prolonged market mayhem”.

114 Italian Banks (Roughly 23%) Have NPLs Exceeding Tangible Capital

114 Italian banks have non-performing loans that exceed tangible capital. Ratios above 100% are signs of severe stress.

Pondering the Collapse of the Entire Shadow Banking System

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French and Italian Bank Deposits vs. Guarantees: How Safe is Your Money?

Inquiring minds might be interested in stats on French and Italian bank deposits and deposit guarantees.