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Monte dei Paschi’s last-ditch rescue plan faces high hurdles

MILAN With the ink barely dry on its bailout plan, Italian bank Monte dei Paschi di Siena (BMPS.MI) faces a Herculean task convincing investors to back a third recapitalization in as many years and avert a banking crisis that would send shockwaves across Europe.

To stave off the risk of being wound down, the world’s oldest bank hastily unveiled the private sector-backed rescue blueprint late on Friday. It came just hours before the lender emerged as the worst performer in European stress tests that showed its capital would be entirely wiped out in a severe economic downturn.

The plan aims to clean up and bolster the bank’s balance sheet once and for all, restoring to health a lender whose frailty threatens the wider Italian banking system, the savings of thousands of retail investors and the increasingly weak political standing of Prime Minister Matteo Renzi.

A financial crisis in the euro zone’s third-biggest economy would also risk creating contagion across Europe, a region already reeling from Britain’s decision to leave the EU.

The two-pronged rescue scheme hinges on Monte dei Paschi raising 5 billion euros ($5.6 billion) in a cash call to be completed by the end of the year – a tall order for a lender that is worth less than 1 billion on the market and has burned through 8 billion euros from share issues since 2014.

Global investment banks have made a preliminary agreement to underwrite the rights issue by Italy’s third biggest bank.

But this is subject to conditions, including that the second prong of the bank’s plan is successful: the sale of 9.2 billion euros of bad loans via a mammoth securitization, whose sheer size is unprecedented in Italy.

As the bank’s shares – which have lost nearly 80 percent of their value this year – brace for Monday’s market reaction to the bailout scheme, senior bankers and fund managers are already questioning the chances of the plan’s success.

“Both legs of the plan are potentially fragile,” said Filippo Alloatti, credit analyst at asset manager Hermes Investments.

“It will be difficult to complete such a big capital increase given their track record with past cash calls, and the securitization is a monster operation, a puzzle full of moving pieces that need to fall into place. The execution risk is significant.”


The global coordinators for the cash call, JPMorgan (JPM.N) and Italian investment bank Mediobanca (MDBI.MI), have secured a pre-underwriting agreement from another six banks – Santander (SAN.MC), Goldman Sachs (GS.N), Citi (C.N), Credit Suisse (CSGN.S), Deutsche Bank (DBKGn.DE) and Bank of America (BAC.N).

But at least three banks – Intesa Sanpaolo (ISP.MI), UniCredit (CRDI.MI) and Morgan Stanley (MS.N) – opted out, highlighting doubts among investment bankers over whether Monte dei Paschi can muster enough investor support for its plan.

Also, the pre-underwriting is not a final commitment by the banks involved to mop up any unsold shares in the rights issue.

Monte dei Paschi has been in crisis mode for years due to a disastrous acquisition of a regional Italian lender on the eve of the financial crisis, accumulated losses and a fraud scandal.

Analysts at broker Equita said in a note it would be “almost impossible” for the lender to raise all the required cash in current choppy markets.

Italian bank shares have tanked this year as the industry is weighed down by 360 billion euros in problematic loans, more than a third of the euro zone’s total. Italy’s biggest bank by assets, UniCredit, is also expected to soon tap the market in a multi-billion euro rights issue that could lure investors away from Monte dei Paschi’s own capital raising.

And market sentiment towards Italy could sour further if a constitutional referendum in the autumn, on which Renzi has wagered his job, does not go the prime minister’s way.

Monte dei Paschi’s management said on Friday it would also look at other capital-boosting measures, which bankers say could include the conversion of subordinated bonds into shares, to reduce the size of its cash call.


The banks’ preliminary commitment to underwrite the capital increase is in any case subject to the Tuscan lender moving the worst of its bad loans off its balance sheet and into a special vehicle which will have to sell them.

The loans will be securitized, with a senior tranche of 6 billion euros benefiting from an Italian government guarantee, the 1.6 billion euro mezzanine tranche being bought by Atlante, a private-sector bank-rescue fund, and the riskiest or junior portion left with Monte dei Paschi shareholders.

But it is unclear how much of the senior tranche will fetch the investment grade required for the government guarantee to kick in. Sources close to the deal said the process could take a year as a due diligence of the underlying loans needs to be completed for rating agencies to gauge their worthiness against an uncertain economic backdrop for Europe post-Brexit.

JPMorgan has taken on additional exposure to the deal by committing to grant a syndicated bridge loan of around 6 billion euros to finance the special vehicle and give it breathing space to engineer the securitization of the loans.

JPMorgan did not immediately respond to requests for comment.

“It will be challenging to place the senior tranche as only part of it will potentially be eligible and assisted by GACSs (government guarantees). Part of the 6 billion will not be investment grade and it will be difficult to place,” said LC Macro Chief Economist Lorenzo Codogno, a former chief economist at the Italian treasury.

Meanwhile, the Atlante fund is scrambling to beef up its coffers by around 2 billion euros with contributions from the post office, private pension funds and other institutions.

Despite the daunting obstacles, analysts say that if the rescue is successful, it could be replicated to help other Italian banks offload their bad loans and restore confidence in the sector.

“Italy is on a good course to solve its banking issues. However, leaving aside some near-term re-pricing of risk, this is not yet a turning point,” said Codogno.

($1 = 0.8944 euros)

(Additional reporting by Pamela Barbaglia in London; Editing by Pravin Char)

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Volkswagen executive ordered to pay back expenses for private party-report

FRANKFURT The head of Volkswagen’s (VOWG_p.DE) luxury unit Audi has been ordered to reimburse the car maker for the costs of a party that the car maker had initially paid for, a German weekly reported.

Audi Chief Executive Rupert Stadler has paid back 12,500 euros ($13,980) that he had expensed for a ‘beer contest’ with about 30 top managers in May 2015, after an internal revision reclassified the event as a private party, Bild am Sonntag reported.

Audi, where part of Volkswagen’s defeat software was developed that lies at the heart of its emissions scandal, declined to comment on Sunday.

Expenses are a hotly debated matter in Germany, where the secretary of an industrial association was fired in 2009 after admitting to the theft of one meatball, while executives are often viewed as enjoying too many opportunities to expense private luxuries.

($1 = 0.8944 euros)

(Reporting by Arno Schuetze; Editing by Adrian Croft)

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German authorities clear Opel diesel engines: report

FRANKFURT Germany’s Federal Office for Motor Vehicles has approved diesel engines of General Motors’ (GM.N) Opel unit, after initial doubts about whether the engine control software was permissible, weekly Bild am Sonntag reported.

Engines of the 2.0 CDTI type which are built into Insignia, Cascada or Zafira branded cars have been cleared, the paper reported.

Opel had no comment while the Federal Office for Motor Vehicles was not immediately available for comment.

A German investigating committee earlier this year shortlisted 30 car models which showed suspiciously high levels of carbon dioxide (CO2) emissions for further testing after Volkswagen (VOWG_p.DE) admitted it cheated U.S. emissions tests by installing software capable of deceiving regulators.

Among the carmakers under scrutiny was Opel which had admitted that its Zafira model includes engine software that switches off exhaust treatment systems under certain circumstances.

(Reporting by Arno Schuetze; Editing by Adrian Croft)

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Helicopter money talk takes flight as Bank of Japan runs out of runway

TOKYO The Bank of Japan’s review of its monetary stimulus program promised for September has revived expectations it could adopt some form of “helicopter money”, printing money for government spending to spur inflation.

The BOJ disappointed market hopes on Friday that it might increase its heavy buying of government debt or lower already negative interest rates, cementing the view that it is running out of options within its existing policy framework to lift prices and end two decades of deflationary pressure.

With little to show for three years of massive monetary easing, economists say BOJ governor Haruhiko Kuroda’s “comprehensive assessment” of policy could push it into closer cooperation with Prime Minister Shinzo Abe, who announced a fiscal spending package worth more than 28 trillion yen ($275 billion) on Wednesday in a bid to kickstart growth.

“The comprehensive review might be the first step toward further collaboration with the government, hinting at helicopter money,” said Daiju Aoki, economist at UBS Securities.

“The government could issue 50-year bonds, and if the BOJ makes a commitment to hold them for a very long time, that would be like helicopter money.”

The helicopter money metaphor for the aggressive printing of new money was first used by American economist Milton Friedman in 1969 and cited by former U.S. Federal Reserve chairman Ben Bernanke in 2002 as a scheme that could fight deflation.

Some economists, however, fear it could trigger hyperinflation and uncontrollable currency devaluation.

Speculation that Japan might take that path reached fever pitch earlier in July when Bernanke met Abe and Kuroda in Tokyo, though policymakers quickly tried to damp down such talk.


In the narrowest sense, a government can arrange a helicopter drop of cash by selling perpetual bonds, which never need to be repaid, directly to the central bank.

Economists do not expect this in Japan, but they do see a high chance of mission creep, with the BOJ perhaps committing to buy municipal bonds or debt issued by state-backed entities, giving its interventions more impact than in the treasury bond market, where it is currently buying 80 trillion yen a year of Japanese government bonds (JGBs) from financial institutions.

“Compared with government debt, these assets have low trading volume and low liquidity, so BOJ purchases stand a high chance of distorting these markets,” said Shinichi Fukuda, a professor of economics at Tokyo University.

“Prices would have an upward bias, so even if the BOJ bought at market rates, this would be considered close to helicopter money.”

Other options include creating a special account at the BOJ that the government can always borrow from, committing to hold a certain percentage of outstanding government debt or buying corporate bonds, economists say.

With the BOJ’s annual JGB purchases already more than twice the volume of new debt issued by the government, Japan has already adopted something akin to helicopter money, said Etsuro Honda, a former special adviser to the Cabinet and a key architect of Abe’s reflationary economic policy.

But it has not been enough to stop consumer prices falling in June at their fastest since the BOJ began quantitative easing in 2013.

Ahead of its July 29 policy meeting, sources had indicated that the BOJ was leaning towards standing pat because it planned no major changes to its consumer price forecasts.

But then Abe announced his unexpectedly large spending package two days earlier, which was notably lacking in details on how to fund it. Prominent cabinet ministers promptly piled in with public comments urging the BOJ to follow the government’s lead.

In the event, the BOJ made what economists called a token response by increasing its purchase of exchange-traded funds to 6 trillion yen, but it resisted pressure to buy more bonds, and it kept interest rates at minus 0.1 percent.

But the results of that pressure could finally show up in September’s review, after it has had time to come up with a more detailed plan to cooperate with Abe’s fiscal push.

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(Additional reporting by Izumi Nakagawa and Yoshifumi Takemoto; Editing by Will Waterman)

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Chinese consortium agrees to $4.4 billion deal for Caesars online games

A Chinese consortium that includes game developer Shanghai Giant Network Technology Co Ltd and e-commerce company Alibaba Group Holding Ltd (BABA.N) founder Jack Ma has agreed to acquire Caesars Interactive Entertainment Inc’s online games unit for $4.4 billion in cash, the companies said.

Caesars Interactive Entertainment is currently owned by Caesars Acquisition Co (CAC) (CACQ.O) and Caesars Entertainment Corp CRZ.O. The sale will be a boon to the two affiliated companies, which are looking for cash as they embark on a complex merger.

The deal follows a period of exclusive negotiations between Caesars Interactive Entertainment and Giant’s consortium that were first reported on July 21 by Reuters.

Caesars Entertainment’s main operating unit, Caesars Entertainment Operating Co Inc (CEOC), is currently involved in an $18 billion bankruptcy and is seeking creditor approval for a restructuring plan. The transaction between CAC and the Caesars Entertainment parent is part of a complex web of deals that have come under scrutiny by CEOC’s creditors.

Chinese companies are eager to expand beyond their home country, which boasts the world’s largest online gaming market. In June, Tencent Holdings Ltd (0700.HK), China’s biggest gaming group, agreed to buy a majority stake in ‘Clash of Clans’ mobile game maker Supercell from SoftBank Group Corp (9984.T) in an $8.6 billion deal.

Caesars’ online games business, known as Playtika, makes its games such as Bingo Blitz and Slotomania available on Apple Inc’s (AAPL.O) App Store. Playatika will continue to operate independently with its own management team and its headquarters remaining in Herzliya, Israel, following the deal, the companies said.

Playtika players use virtual currency that cannot be exchanged for real money, although players can spend money by buying items in the games. Caesars’ World Series of Poker and real-money online gaming businesses are not part of the deal, according to the companies.

Giant is one of China’s biggest gaming companies, with nearly 50 million monthly active users and several top-grossing mobile titles. It was taken private in 2014 for $3 billion by a group of buyers that included company Chairman Yuzhu Shi and private equity firm Baring Private Equity Asia Ltd. It is now valued at more than $12 billion.

The Chinese consortium involved in the deal also includes Ma’s private equity firm Yunfeng Capital, China Oceanwide Holdings Group Co, China Minsheng Trust Co, CDH China HF Holdings Company Limited, and Hony Capital Fund, the companies said.

The merger between the owners of Caesars Interactive Entertainment is intertwined with the bankruptcy of CEOC, whose restructuring plan hinges on billions of dollars of cash and equity from its parent.

CEOC’s creditors have accused the parent company of looting choice assets from its operating unit and leaving it bankrupt. Caesars has said the acquisitions were done at fair value.

While proceeds from a Caesars Interactive online games unit sale will help the bankruptcy estate, junior creditors may still object to the distribution of the funds because more money will end up in the hands of first lien banks and lenders.

Junior creditors led by Appaloosa Management remain the biggest hold-outs in the CEOC bankruptcy, and have said they have as much as $12 billion in claims against Caesars Entertainment and its private equity backers, Apollo Global Management LLC (APO.N) and TPG Capital LP.

(Reporting by Liana B. Baker in New York and Allison Lampert in Montreal; Additional reporting by Tracy Rucinski in Chicago)

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UK and China regulators discuss framework for financial projects

HONG KONG British and Chinese securities watchdogs are discussing an agreement that will pave the way for landmark financial services projects between the countries, sources said, easing fears that Britain could be a less attractive partner for such deals after last month’s vote to leave the European Union.

Britain’s Financial Conduct Authority (FCA) and the China Securities Regulatory Commission (CSRC) are cooperating on a regulatory framework for a scheme for distributing fund products in each other’s jurisdiction and a proposed London-Shanghai link for trading shares, two people with direct knowledge of the matter said.

Britain, home to the EU’s biggest finance sector, has been pushing in recent years to deepen its financial services ties with China, which has agreed to these and other cross-border financial services schemes as part of the UK-China Economic and Financial Dialogue (EFD) program.

The UK’s former Chancellor George Osborne and Chinese vice premier Ma Kai said at last September’s EFD meeting in Beijing that they would explore the creation of a London-Shanghai equity link and mutual funds recognition scheme, but neither government has provided further details.

The formal cooperation between the FCA and CSRC signals that the projects are going ahead, with one source saying the discussions had remained “very positive”.

Some market watchers had raised concerns that leaving the EU, which puts in doubt the UK’s future access to the trading bloc and its “passports” to provide financial services there, could scupper such projects by limiting their potential scope and appeal.

“So far none of the cross-border exchange initiatives has been derailed by the risk of Britain leaving the European economic area and the associated passporting rights,” said Frederic Ponzo, managing partner at financial services consultancy GreySpark Partners in London.

“What is clear is that the CSRC and the FCA will not stop cooperating after the vote to leave the EU,” he added.

A second source said the FCA and CSRC were exploring a regulatory agreement similar conceptually to a memorandum of understanding (MOU) inked by the CSRC and the Hong Kong Securities and Futures Commission (SFC) prior to the launch of the Hong Kong-Shanghai stock trading link in November 2014.

The Hong Kong-China MOU created a framework for policing the scheme, including sharing trading data and coordinating on investigations, although it was not clear if a UK-China cooperation would be as far reaching, the sources said.

Details of the regulatory agreement may be announced at the next EFD meeting in the Autumn, though this has not been decided yet, both sources said. One said the UK and China may also unveil cooperation on so-called “fintech” initiatives.

Both said, however, that Britain and China did not expect to announce any major new financial services initiatives at this year’s EFD meeting, the date for which has not been set but will likely be held in October or November in Britain, a third source said, while both countries analyze the implications of Britain’s exiting the EU.

The FCA declined to provide comment. The CSRC, UK Treasury and Chinese Ministry of Finance did not respond to requests for comment.

(Reporting by Michelle Price; Additional reporting by Ben Blanchard and the Beijing newsroom; Editing by Will Waterman)

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U.S. authorities subpoena Goldman in 1MDB probe: WSJ

U.S. authorities have issued subpoenas to Goldman Sachs Group Inc (GS.N) for documents related to the bank’s dealings with scandal-hit Malaysian state fund 1MDB, the Wall Street Journal reported late on Friday.

Goldman received the subpoenas earlier this year from the U.S. Department of Justice (DoJ) and the Securities and Exchange Commission (SEC), the Journal reported, citing a person familiar with the matter.

The authorities also want to interview current and former Goldman employees in connection with the inquiries, but none of those meetings had occurred by Friday, WSJ said.

The Department of Justice and the SEC declined to comment. No one from Goldman Sachs was available for comment outside regular U.S. business hours.

1MDB, which was founded by Malaysian Prime Minister Najib Razak in 2009 shortly after he came to office, is being investigated for money-laundering in at least six countries including the United States, Singapore and Switzerland.

Najib has consistently denied any wrongdoing.

U.S. law enforcement officials are attempting to identify whether Goldman violated federal law after failing to flag a transaction in Malaysia, the Journal reported in June.

New York state regulators have also asked the Wall Street bank for details about probes into billions of dollars it raised in a bond offering for 1MDB, Reuters reported in June, citing a person familiar with the matter.

(Reporting by Ismail Shakil in Bengaluru and Suzanne Barlyn in New York; Editing by Sandra Maler and Kim Coghill)

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Data in focus as market struggles for direction

NEW YORK Wall Street, seeking direction as the SP 500 has been stuck in a narrow trading range for 12 days, will next week shift its attention from second-quarter corporate earnings reports to economic data.

Investors will be looking for signs of economic strength to reinforce the positive direction hit Friday, when the SP 500 hit an intraday record high. Data estimates for next week show the manufacturing and services sectors are expected to have expanded in July while the economy is seen having added a healthy 180,000 jobs this month.

“I think the economy in the U.S. is getting better and still can improve. The overall tone will be of an economy that is getting better at a reasonable pace,” said John Manley, chief equity strategist at Wells Fargo Funds Management in New York.

The U.S. stock market has been trading flat as second-quarter earnings have come in better than initially expected, but the outlook for third-quarter earnings has worsened. In fact, the SP 500 traded in a less-than-1 percent range throughout the 12 sessions to Friday, a lull not seen in data going back to 1970, according to Ryan Detrick, the senior market strategist at LPL Financial.

It is no wonder that investors are suffering from a lack of resolve; they have been pushed and pulled by a slew of other factors, including worries about the global economy and the fact that shares have already been on a tear not well supported by several quarters of weak earnings. Stocks are pricey now, but so are other asset classes.

The SP 500 is trading near its record high, at roughly 17.2 times the earnings of its component companies over the next 12 months, a valuation that is expensive when compared to its 15.5 median, according to Thomson Reuters data.

Selling is not an obvious choice either, since those who must remain invested face few other choices. Bonds sport high prices and near-record-low yields, and commodities, led by oil, hit a wall after a strong first half of the year. U.S. crude CLc1 is down 14 percent this month alone.

The lack of direction in the SP index as it sits near its record close of 2,175.03 hit July 22 could be an indication of strength, as these new highs are digested by the market.

If the jobs report data land far from expectations, that will likely give indexes a jolt on Friday, said Michael Yoshikami, CEO and Founder at Destination Wealth Management in Walnut Creek, California.

But neither that jolt nor the earnings reports still to come would be enough to set stocks on a new course, he said, because of the uncertainty brought on by the final stretch of the U.S. presidential election campaign leading up to the Nov. 8 vote.

“Between now and the election there‚Äôs going to be so many headlines that it’s going to be difficult for the market to really rally significantly,” Yoshikami said.

(Reporting by Rodrigo Campos; Editing by Linda Stern and James Dalgleish)

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No clean bill of health for EU banks in stress test

LONDON Banks from Italy, Ireland, Spain and Austria fared worst in the latest European Union stress test, which the region’s banking watchdog said on Friday showed there was still work to do in order to boost credit to the bloc’s economy.

Eight years since the collapse of Lehman Brothers sparked a global banking meltdown, many of Europe’s banks are still saddled with billions of euros in poorly performing loans, crimping their ability to lend and putting off investors.

“While a number of individual banks have clearly fared badly, the overall finding of the European Banking Authority – that Europe’s banks are resilient to another crisis – is heartening,” Anthony Kruizinga at PwC said.

Italy’s Monte dei Paschi (BMPS.MI), Austria’s Raiffeisen (RBIV.VI), Spain’s Banco Popular (POP.MC) and two of Ireland’s main banks came out with the worst results in the EBA’s test of 51 European Union (EU) lenders.

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

Italy’s largest lender, UniCredit (CRDI.MI), was also among those banks which fared badly, and it said it will work with supervisors to see if it should take further measures.

Germany’s biggest banks, Deutsche Bank (DBKGn.DE) and Commerzbank (CBKG.DE), were also among the 12 weakest banks in the test, along with British rival Barclays (BARC.L).

Monte dei Paschi, Italy’s third largest lender, had been scrambling to pull together a rescue plan and win approval for it from the European Central Bank ahead of the test results.

The Italian bank confirmed less than an hour before the results that it had finalised a plan to sell off its entire portfolio of non-performing loans and had assembled a consortium of banks to back a 5 billion euro capital increase.

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

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

“Based on these results European banks do have deeper loss absorbing capacity than previously, but concerns clearly remain around profitability and the appetite of equity investors to invest in bank stocks,” said Steven Hall of KPMG.

Analysts have informally set a basic pass mark of 5.5 percent, the threshold set in the last round of tests in 2014, and a weak result could raise question marks over dividend payments.


Like Monte dei Paschi, Allied Irish Banks was also below the 5.5 percent level at 4.31 percent, but said it has undergone fundamental restructuring and is now sustainably profitable.

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.

“We are aware of our capital situation and have been implementing for some time appropriate measures to strengthen our capital base,” Raiffeisen CEO Walter Rothensteiner said.

Popular earlier said that it had fired its chief executive Francisco Gomez after its profit was nearly wiped out in the second quarter. It said the EBA tests had not included the 2.5 billion euro share issue it completed in May to clean up toxic retail assets.

Deutsche Bank and Commerzbank both scored core ratios of below 8 percent, although Deutsche said it was on track to reach at least 12.5 percent by the end of 2018.

Of the banks tested, 37 are based in the euro zone and supervised by the ECB, which said the results reflected progress in repairing balance sheets.

“The banking sector today is more resilient and can much better absorb economic shocks than two years ago,” said Daniele Nouy, who heads supervision at the ECB.

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

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

(Editing by Alexander Smith)

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