Italy: Stress test analysis could renewed volatility in financial markets - Wells Fargo

According to analysts from Wells Fargo, the stress test analysis that will be released July 29 may shed some light on the capitalization health of the Italian baking system.

Key Quotes:

“Italian banks have faced a challenging operating environment since the advent of the global financial crisis, and their share prices have lurched lower in recent weeks. Non-performing loans have mushroomed in recent years, and some analysts worry that individual banks are now seriously undercapitalized. The stress test analysis that is scheduled for release on July 29 may shed some light on the capitalization needs of Italian banks.”

“Although the Italian economy is among the largest in the world, banking systems in most countries do not have an inordinate amount of exposure to it. The French banking system has nearly €300 billion worth of total exposure to Italian companies, banks, individuals and government, but this amount represents only 5 percent of French banking system assets. Exposure to the Italian economy accounts for less than 2 percent of banking system assets in other major economies. A stress test analysis that is critical of some Italian banks could lead to renewed volatility in Italian financial markets, if not in financial markets in other countries as well.”

“In that regard, a banking crisis in Italy could potentially bring banking systems in other Eurozone countries under the spotlight.”

“Any tightening in financial conditions that resulted from renewed financial market volatility could weaken economic activity across the Eurozone, thereby making bank recapitalization in other countries more likely. A banking crisis that was confined solely to Italy should not ignite a global banking crisis. But any potential contagion effects emanating from Italy would certainly warrant watching.”