Monte dei Paschi fares worst in EU banks stress test

By Huw Jones and Andrew MacAskill

LONDON (Reuters) - Monte dei Paschi , Raiffeisen , Banco Popular and two of Ireland's main banks came out worst in a European Union stress test aimed at cleaning up balance sheets to boost the flow of credit to the bloc's economy.

The European Banking Authority which coordinated the test of 51 lenders from across the bloc said the results showed there was still more work to do to put banks on a firmer footing.

"Whilst we recognise the extensive capital raising done so far, this is not a clean bill of health," EBA Chairman Andrea Enria said in a statement on Friday. "There remains work to do."

The results came after Monte dei Paschi, weighed down by billions of euros in bad loans, put together an 11th hour rescue package to raise some 5 billion euros to mitigate fallout from the stress test outcome.

The EBA test looked at how banks could withstand a three-year theoretical economic shock which ended with the Italian lender, the world's oldest have a core equity capital ratio of minus 2.44 percent.

This was the third stress test of banks in the EU since taxpayers had to bail out lenders in the 2007-09 financial crisis, with no pass or fail mark this time round.

Analysts have informally set a basic pass mark of 5.5 percent, the threshold set in last year's test.

The test involved scenarios including EU economic output that was 7.1 percent below the baseline over the next three years and a 20 percent drop in interest income.

Like Monte dei Paschi, Allied Irish Banks was also below this level at 4.31 percent.

Markets will also look at how many banks were able to maintain a core ratio of capital to risk-weighted assets of 7 percent. This is a typical level for triggering the writedown of bonds issued by banks to replenish capital.

Spain's Banco Popular, Bank of Ireland and Austria's Raiffeisen all ended the test below this level at 6.62 percent, 6.15 percent, and 6.12 percent, respectively.

At the start of the test, the 51 lenders had an aggregate core ratio of 12.6 percent, with all capital requirements factored in.

This fell to 9.2 percent by the end of the test, a drop of 340 basis points, equivalent to 226 billion euros of capital.

For the first time, the EU test included the impact of conduct risks such as fines and settlements on capital during the exercise.

EBA said the total hit from conduct costs was 71 billion euros. The largest impact was from credit or losses on loans, totalling nearly 350 billion euros across all the banks tested.

(Reporting by Huw Jones)