The world's oldest operating bank would be unlikely to cope with a shock to the global economy or strained financial markets, claims the European Banking Authority (EBA). Founded in 1472, the Banca Monte dei Paschi di Siena, which is now Italy's third largest bank, emerged as the weakest bank in Europe following a series of stress tests by the financial institution watchdog.
While the stress tests do not give a simple pass or fail mark, the EBA found the bank was found to have inadequate capital reserves to withstand a three-year economic shock. Under the latest stress test scenario, around £227bn would have been wiped off the capital bases of European banks as economic output fell by 7.1%.
Before the stress test results were announced, Banca Monte had announced it would sell €9.2bn (£7.7bn, $10.28bn) of bad debts and its entire portfolio of non-performing loans (loans in which the borrower is not paying off the interest or the principle amount borrowed).
The bank is also working on assembling a consortium of banks to back a €5bn capital boost – a deal which Italy's finance minister, Pier Carlo Padoan said the government was "greatly satisfied" with.
Founded by order of the Magistrature of the Republic of Siena as Monte di Pietà in 1472, when its statute was approved, Banca Monte has been in operation without interruption to the present day. it is considered to be the oldest bank in the world still operating.
News of its parlous state came within days of Padoan claiming that there was no financial crisis in Italy, even though the country's banks are currently carrying around €360bn of bad debts.
However, Antonio Patuelli, president of the Italian Banking Association (ABI) called the tests "a very severe exercise, with highly improbable adverse scenarios".
"From the outset, the methodology adopted was clearly unfavourable for banks primarily engaged in lending to clients, such as the Italian ones," he said. "For these lenders, for instance, interests on impaired loans were not considered in the assessment, despite the actual possibility of generating at least partial proceeds from them."
He added: "Nevertheless, the overall result is ultimately satisfactory for European banks, including Italian ones. The results of four of them were better than the market's expectations, while the fifth bank has just won the approval of the ECB to implement a comprehensive capital reinforcement plan."
Austria's Raiffeisen, Spain's Banco Popular and two of Ireland's main banks also came out with the worst results in the EBA's test of 51 EU and European Economic Area lenders. Britain's worst performing bank was Barclays.
Barclays was found to have sufficient reserves to cope with a crash but ended up among the worst 12 performers of the 51 tested. Nonetheless, the EBA's chair Andrea Enria said the test showed "the benefits of capital strengthening done so far are reflected in the resilience of the EU banking sector to a severe shock".
She said, "The EBA's stress test is not a pass [or] fail exercise. While we recognise the extensive capital raising done so far, this is not a clean bill of health. There remains work to do which supervisors will undertake."
In 2014, the EBA tested 124 banks for their ability to withstand economic and market shocks. The EBA selected 70% of banks operating in Europe: 37 from countries using the euro, and 14 from Denmark, Hungary, Norway, Poland, Sweden and the UK. Each bank had to have at least $30bn in assets when the start of the test.