Italy’s Monte dei Paschi di Siena was by far the worst performer in a stress test of EU banks, which otherwise on Friday found the region’s top lenders to be in relatively good shape. But the troubled bank sought to get ahead of the poor result with the announcement of a 5 billion euro ($5.6 billion) capital increase.
The money injection from private sources avoids a potentially painful bailout for the Italian bank that under EU rules would have imposed losses on creditors like bondholders, many of which are small savers in Italy.
The Italian treasury said in a statement it was satisfied with the deal that would ease the bank’s bad loan burden and allow it to create a business plan to support the real economy with credit to businesses and families.
The EU-wide stress tests showed that most of the 51 European banks that were scrutinized were strong enough to withstand a sharp drop in the economy and markets. Beyond Monte dei Paschi, Ireland’s Allied Irish Bank and Austria’s Raiffeisen proved to be the weakest financially.
Monte dei Paschi is among the most troubled of Italy’s banks, which include smaller ones not covered by Friday’s stress tests, and are struggling with 360 billion euros ($400 billion) in soured loans.
Fixing the banks is crucial for Italy and the wider eurozone because financially weak banks are more reluctant to lend out money to households and businesses, stifling the potential for economic growth needed to create jobs, as Pantagraph reported.