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 negative 2.44 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.

Confidence Shell Game

Instead, debt was repriced lower across the board and more write downs are feared.

Monte dei Paschi Down 16% Today

MDP 2016-08-02

Monte dei Paschi Down 99.72% Since May 2007 High

MDP 2016-08-02A

It’s not just Monte dei Paschi, or even just Italian banks.

BNP Paribas Daily Chart

BNP Daily

BNP Paribas, a French multinational bank is a certified all star compared to German banks.

Deutsche Bank Daily Chart

DB Daily

Deutsche Bank Monthly Chart

DB Monthly

What About Commerzbank?

May 1, 2016: Commerzbank Looks to Build on Gains of Recent Years

July 25, 2016: Commerzbank Warns of Decline in Capital Position

In an unscheduled announcement, Germany’s second-largest bank by assets said that its core tier one capital ratio — a key measure of financial strength — had fallen from 12 per cent at the end of March to 11.5 per cent at the end of June.

That is still above regulators’ minimum requirements — but diverges from the 12 per cent that analysts had been expecting, which triggered the impromptu disclosure under Germany’s strict securities laws.

Commerzbank Daily Chart

Commerzbank Daily

Commerzbank Monthly

Commerzbank Monthly

Race to Zero

I am sure glad “Commerzbank Looks to Build on Gains of Recent Years”.

Are they talking about gains in the race to zero?

If so, percentage-wise Commerzbank is ahead of Deutsche Bank but behind Monte dei Paschi. The last final plunge takes considerable effort however. Monte dei Paschi remains the overwhelming odds-on favorite.

The Financial Times discusses the Vanishing Market Value of European Banks.

“The key to us is understanding this is a profitability issue versus an insolvency issue,” says Hani Redha, a portfolio manager at PineBridge Investments, regarding the sector’s performance.”

I suggest (as does the market) the entire European banking system is on the verge of collapse.

Mike “Mish” Shedlock