European Banking System On Verge Of Collapse; Market Votes “No Confidence” In Italian Bank Rescue

European bank shares are down for the second day following a last minute bailout package aimed at Italian banks one day before a stress test showed Monte dei Paschi would be insolvent in an adverse scenario.

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.

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