By Valentina Za and Steve Slater
MILAN/LONDON (Reuters) - Shares in Italy's third-biggest bank Monte dei Paschi di Siena (MI:BMPS) slumped to an all-time low on Thursday, as fears it could fail European stress tests combined with a fraught global economic backdrop which weighed on the sector.
The European Central Bank (ECB) will unveil the results of its balance sheet review and stress tests on Oct. 26 and Monte dei Paschi is seen by many analysts as one of the banks most at risk of failing, despite raising 5 billion euros ($6.4 billion) from shareholders in June to bulk up its balance sheet.
The ECB audit of the euro zone's banks is piling pressure on lenders, already suffering from stalled growth which has put the euro zone back at the centre of a global market rout.
Shares in Monte dei Paschi, bailed out by Italy after being hard hit in the euro zone debt crisis and a scandal over loss-making derivative trades, have halved in value since its rights issue.
Just over 1 billion euros has been wiped off its stock market value in the past three days on concerns it may be forced to tap investors for even more cash.
Such fears come on top of warnings that Europe risks falling into a spiral of falling wages and prices, threatening banks' ability to recover from a debt crisis which just two years ago put a question mark over the future of the currency zone.
If banks who fail the stress tests cannot raise capital from stock markets, there is the possibility they will impose losses on bondholders or have to tap their governments or Europe's bailout fund, the ESM, to fill the gap.
"In this type of market investors are running for cover. They are looking for safe-haven plays and away from distressed banking names, which explains why those riskier institutions are getting hit harder," said Ciaran Callaghan, analyst at Dublin-based Merrion Stockbrokers.
"Banks that are required to prepare capital plans after shortfalls are exposed in the stress tests will find it more difficult to raise equity privately if weak markets persist," Callaghan added. "This may bring the prospect of bondholder, sovereign or ESM participation back on to the table."
Shares in Monte dei Paschi were down nearly 10 percent to a record low of 0.8075 euros. Banco Popolare di Milano (MI:BAPO), which raised 1.5 billion euros in April, was down 7 percent.
MPS's chief executive has said the bank's capital raising efforts put it on a stable footing, but a big shareholder said late last month it was uncertain whether the ECB health checks would result in further capital requirements.
Banco Popolare's CEO has said he is confident the lender will pass the stress tests and will not ask shareholders for more cash as long as he is in the job.
GLOOMIER OUTLOOK
Meanwhile even banks not seen at risk of failing the ECB review were sharply down as the gloomier outlook for the regional economy threatened to further pressure profit margins, already squeezed by low interest rates and the increased cost of lending in the wake of the financial crisis.
Among the top 10 European bank fallers <.SX7P> were French lenders Natixis (PA:CNAT) and Societe Generale (PA:SOGN), down 6 percent and 5 percent respectively. Portugal's BCP (LS:BCP) and Germany's Deutsche Bank (DE:DBKGn) were around 5 percent weaker.
The ECB was preparing to loosen its rules on what sort of collateral Greek banks could park with it to access cheap funding, a Greek central bank official said, after the country's stocks and bonds plunged this week on fears of a snap election and Athens' plans to quit its bailout early.
Europe's stress tests are designed to reassure investors once and for all that the region's banks have put their debt crisis behind them. But a senior International Monetary Fund (IMF) official has warned European banks were still struggling to adapt to a new era of lower profits and some should be shut.
"The crisis has led to an environment that is vastly different to what we had before ... and banks are struggling to adapt their business models to the post-crisis realities," Jose Vinals, director of monetary and capital markets at the IMF, told the British Bankers' Association annual conference.
"In those cases where there are banks that need to exit because the field is too crowded, I'm thinking of continental Europe, then supervisors and authorities ... need to facilitate the exit of those institutions, because those banks should not be there."
Vinals said an IMF study of 300 of the largest banks showed 80 percent of banks in the United States could make a reasonable return while building up their capital and supporting new lending, compared with about 30 percent of eurozone banks.
(1 US dollar = 0.7843 euro)
(Additional reporting by Francesco Canepa, Huw Jones and Matt Scuffham in London, with Carmel Crimmins in Dublin; Editing by David Holmes)