Blog Post

What the 2018 EBA stress tests (don’t) tell you about Italy

The results of the latest European Banking Authority stress tests were eagerly awaited for their results on the four biggest Italian banks. At first sight, these banks seem well prepared to withstand an adverse macro-financial shock. But judging by the market reaction following their publication, the results have not appeased investors.

By: and Date: November 15, 2018 Topic: Macroeconomic policy

November has brought with it the results of the European Banking Authority (EBA) 2018 EU-wide stress tests. This exercise, aimed at surveying the resilience of EU banks against adverse market developments, covers 70% of total banking-sector assets across 48 EU banks.

The results of the EBA stress tests were anticipated particularly for the results reported on the four biggest Italian banks: BPM, Intesa Sanpaolo, UniCredit and UBI. In this blog post, we consider how useful these numbers are and pick out specific limitations.

At first sight, Italian banks seem well prepared to withstand an adverse macro-financial shock. Two key variables are the Common Equity Tier-1 (CET-1) capital ratio, which reflects the capability of the banks’ capital to withstand shocks, and the leverage ratio, which is indicative of the bank’s ability to meet its financial obligations. After all, the four banks report transitional CET-1 capital ratios above the minimum requirement of 4.5%.  And all banks report levels above the minimum leverage ratio of 3% outlined by the Basel-III regulatory framework.[1] For CET-1 ratios, the impact of the adverse scenario – measured as the difference between the baseline and adverse 2020 scenarios – ranges from 2.64 to 7.27 percentage points. Leverage ratios show differences between the baseline and adverse scenarios ranging from 0.94 to 2.58 percentage points (Figure 1).

Figure 1. CET-1 and Leverage Ratios results by bank

Panel A. CET-1 Ratio, transitional

Panel B. Leverage ratio, transitional

Source: Bruegel based on EBA

However, some qualifications are in order. The first is that this exercise is built on data from end-2017, so it is not fed with the latest information on banks’ balance sheets.

The second is that the uncertainty associated with the latest developments in Italian politics has been left aside from the design of the scenarios. The European Systemic Risk Board (ESRB) had identified in January four main material threats to the stability of the EU financial sector. While political uncertainty and increased volatility in financial markets was one of them, the board was focused mostly on Brexit-associated risks.

The adverse scenarios designed by the ESRB and the ECB are based on projected developments that are summarized in Table 1. Projections from the national central banks are used as baseline forecasts for EU countries. The projections cover three years, beginning with the first quarter of 2018, where shocks are assumed to materalise.

While it is only fair to point out that the adverse scenario presupposes a simultaneous contraction in all variables, which is still not the case, I and others see that the current developments put the BTP-Bund spread (i.e. the difference between the yields on Italian and German government bonds) already beyond the values forecast as the adverse scenario (310 basis points at the time of writing).

The implication is that part of this theoretical stress on the banks’ capital positions is already being experienced. And while the four evaluated banks account for 41.6% of the domestic market in loans, the effects of these developments on smaller, non-evaluated banks is not publicly known. This Monday’s developments surrounding mid-sized lender Banca Carige are not particularly encouraging.

One can ask whether these results really show any new information that the markets did not yet anticipate. Judging by the fall of share prices following their publication, it seems safe to say that investors were not too appeased by the results that came out.

So what other information can we use to derive a better understanding of the risks that the Italian political crisis poses for the euro-area banking system? Data on sovereign exposures is not made available in this exercise. Although the EBA reports that sovereign risk is reflected in credit and market risk, bank-level data will only be made public in December in the context of the 2018 EU-wide transparency exercise. We do know, however, that resident banks have increased their holdings of sovereign debt since 2017.

The exposure of non-resident banks to Italy as a whole is also an important indicator that has been overlooked so far. Figure 2 shows the most recent data for the first quarter of 2018 on the exposure of non-resident banks to Italy. The exposure of French banks to Italy amounts to almost half of the French GDP. In Spain, total claims on Italy amount to a third of Spanish GDP.

However, the composition of these claims differs significantly between countries. While Spain is mostly exposed to the public sector, most of the claims by French banks relate to the private sector (households and companies). While giving a more current version of the events, it is true that these numbers still do not capture the repositioning following the coalition formation in May.

Figure 2. Exposure of banks to Italy, selected countries

Panel 1. Total claims on Italy, % GDP

Panel 2. Composition of claims on Italy, 2018Q1 – % of total claims and EUR million

Source: Bruegel based on BIS Consolidated Banking Statistics

All in all, the EBA stress tests are useful to gather what could happen to banks’ balance sheets in the event of a downturn. Yet looking at indicators such as the exposure of resident banks to the Italian sovereign, or the exposure of non-resident banks to Italy, may give a better insight as to which risks are building up.


[1] Our analysis focuses on transitional ratios. Note that, using fully loaded ratios, BPM presents a leverage ratio of 2.71%, below the minimum Basel III requirement.

Republishing and referencing

Bruegel considers itself a public good and takes no institutional standpoint. Anyone is free to republish and/or quote this post without prior consent. Please provide a full reference, clearly stating Bruegel and the relevant author as the source, and include a prominent hyperlink to the original post.

Read article Download PDF More on this topic More by this author

External Publication

The Value of Money, Controversial Economic Cultures in Europe: Italy and Germany

A discussion of Italian and German macro-economic cultures and performances.

By: Francesco Papadia Topic: Macroeconomic policy Date: June 10, 2021
Read about event More on this topic

Past Event

Past Event

An alpine divide? Comparing economic cultures in Germany and Italy

A discussion of Italian and German macro-economic cultures and performances.

Speakers: Thomas Mayer, Patricia Mosser, Marianne Nessén, Hiroshi Nakaso, Francesco Papadia, André Sapir and Jean-Claude Trichet Topic: Macroeconomic policy Date: April 13, 2021
Read about event More on this topic

Past Event

Past Event

Think green act local: the role of the G20 in sustainable infrastructure

In this workshop, invited guests will discuss priorities and proposals for the Italian G20 Presidency for a green local infrastructure agenda.

Speakers: Amar Bhattacharya, Marco Bucci, Adriana Calderon, Maria Demertzis, Matthias Helble, Elly Schlein, Niclas Poitiers and Gelsomina Vigliotti Topic: Green economy Date: March 15, 2021
Read article Download PDF More on this topic

Working Paper

COVID-19 credit-support programmes in Europe’s five largest economies

This paper assesses COVID-19 credit-support programmes in five of the largest European economies, and examines how countries have dealt with trade-offs raised by the programmes.

By: Julia Anderson, Francesco Papadia and Nicolas Véron Topic: Macroeconomic policy Date: February 24, 2021
Read article More on this topic More by this author

Blog Post

Can the gap in the Europe’s internal market for banking services be bridged?

The European Union has made significant progress to a more unified banking market but frictions remain between euro and non-euro countries. Without a coordinated approach to remaining issues in completing banking union, the gap could widen.

By: Thomas Wieser Topic: Banking and capital markets Date: December 7, 2020
Read article More on this topic

Blog Post

Growth uncertainty, European Central Bank intervention and the Italian debt

European Central Bank intervention provides a buffer against the uncertainty faced by European Union economies in the face of COVID-19. For the time being, this intervention has alleviated concern about Italy's debt, but without it Italy is vulnerable to a debt crisis.

By: Andrea Consiglio and Stavros Zenios Topic: Macroeconomic policy Date: October 28, 2020
Read article More on this topic


Why OMT is not the solution for Italy right now

The Outright Monetary Transactions tool is not well suited for Italy right now. Italy needs fiscal support both by itself and by the EU. Italy and the rest of the EU need a fiscal bazooka. We should find a way of backstopping our economies immediately.

By: Maria Demertzis and Bruegel Topic: Macroeconomic policy Date: March 16, 2020
Read article More on this topic

Blog Post

To save the Italian economy from the Coronavirus, Rome prescribes a stimulus

Faced with a difficult prognosis, the Italian government has prescribed a three-step strategy to treat the worse economic symptoms of the Coronavirus. The medicine is money and the dosage is €4.5 billion

By: Simone Tagliapietra and Bruegel Topic: Global economy and trade Date: March 3, 2020
Read article More on this topic

Blog Post

European green finance is expanding, a discount on bank capital would discredit it

If EU banks are to mobilise a greater share of loans for sustainable projects they will need a reliable policy framework, clear internal performance targets and the relevant skills. A discount on bank capital underlying such assets is neither justified nor likely effective. A comprehensive review of how climate risks are reflected in prudential regulation is nevertheless in order

By: Alexander Lehmann and Bruegel Topic: Green economy Date: January 15, 2020
Read article More on this topic

Blog Post

A Major Step Toward Combating Money Laundering in Europe

Combating money laundering in Europe took a momentous step with finance ministers of France, Germany, Italy, Latvia, the Netherlands, and Spain putting forward a joint proposal.

By: Nicolas Véron, Joshua Kirschenbaum and Bruegel Topic: Banking and capital markets Date: November 25, 2019
Read article More on this topic


Under swollen tides, Venice says more about our future than our past

While tides high enough to submerge Venice used to be rare, occurring every two to three decades, they have now become increasingly regular. Five of the ten highest tides in recorded history occurred over the last 20 years, with the most recent one having occurred just last year. Is this the new normal?

By: Simone Tagliapietra and Bruegel Topic: Green economy Date: November 18, 2019
Read article More on this topic

Blog Post

Talking about Europe: La Stampa 1940s-2010s

An on-going research project at Bruegel seeks to quantify and analyse printed media discourses about Europe over the decades since the end of the Second World War. In this third blogpost, we carry out the exercise on 9.9 million articles from an Italian daily newspaper, La Stampa. The trend increase in the frequency of European related articles, previously found looking at the French and German press, is confirmed in the case of Italy.

By: Enrico Bergamini, Emmanuel Mourlon-Druol, Francesco Papadia and Giuseppe Porcaro Topic: Macroeconomic policy Date: October 22, 2019
Load more posts