Rumours of ill-health had swarmed around Italy’s Banca Monte dei Paschi di Siena for months, but it was only on the verge of the EU stress test that steps were taken.
The bank was shown to be the weakest of the 51 banks tested. It would not survive if another global financial meltdown takes place.
The bank’s board of directors announced a rescue plan to shift the billions of euros held in bad loans. More than €9 billion of these will be offloaded with the help of the Atlante fund, created specifically to take on doubtful banking assets.
The plan also involves raising €5 billion from private investors to boost capital reserves.
New EU regulations prevented the Italian government from pumping any taxpayer money into the bank, but action was needed to preserve the savings of tens of thousands of Italian citizens who had purchased bonds from the bank.
Some analysts believe that these bad debts could trigger a banking crisis in Italy which would spread and put eurozone in turmoil.
Founded in 1472, the bank is also the third largest in Italy.
The stress test also found weaknesses in the bailed-out Royal Bank of Scotland and in Barclays.
Banks from Italy, Ireland, Spain and Austria fared worst. Spain’s Banco Popular, Bank of Ireland and Austria’s Raiffeisen were also among the weakest performers.
Banks in Portugal, Greece and Cyprus were deemed too small to test.
The result for Deutsche Bank – regarded by the IMF as the world’s most systemically risky bank – was being scrutinised.
At the same time, the regulators said that the tests revealed greater strength overall in the banking sector than had been the case at the time of the 2008 collapse, but that there is more to be done.
"The results of EU-wide bank stress tests show that euro area banks improved their resilience," the European Central Bank said in a statement.
Stress tests were first carried out in 2011 and later in 2014 when 124 banks were tested to see if they were able to withstand sudden economic and market shocks.
The 51 banks involved in this test account for 70% of the banking sector.
