8/8/2019 Europe Bank Stress Tests - Follow Up

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Europe’s bank stress tests: Follow-up

On September 7, the WSJ published an article which outlined why the criteria used for the91 European banks stress tests minimized the debt risk in their portfolios. In particular itpinpointed discrepancies between data published by the BIS and the stresstests. The CEBS did respond to the article, unconvincingly however. If transparency wasreal one should be able to reconcile the numbers or at least explain the differences.

There is however a series of information that corroborate a widespread skepticism aboutthese politically motivated tests triggered in July in a panicky mood which I expressed atthe time of their release (Europe’s banks stress test: not really stressful…).

1.   Among the five Greek bank tested only one failed. The National Bank of Greecesuccessfully passed the tests with a 9.6% tier 1 capital ratio in the adversescenario and 7.4% if a sovereign shocked was to occur, well above the 6% required.This week, the very same bank announced plans to raise EUR 2.8 billion  via an asset sale (EUR 1 billion) and a combination of equity and convertible bonds(EUR 1.8 billion); these EUR 2.8 billion are to compare to the EUR 3.5 billionthat the 7 banks that failed the tests had to raise… European politicians andregulators are lacking credibility indeed.

8/8/2019 Europe Bank Stress Tests - Follow Up

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2.  Portuguese banks increased their borrowing (+0.6% August/July) fromthe ECB to reach EUR 49.1 billion. This is another sign of the failing health of Europe’s banking system. Irish, Spanish and Greek banks are also relianton the ECB for funding. 

3.  In July, the European Central Bank loaned 132 billion euros for three months to 171financial institutions. ECB President Jean-Claude Trichet on Sept. 2 extendedemergency lending measures for banks into 2011. The ECB has bought €61bn ingovernment bonds – mostly of the weaker eurozone economies of Greece, Irelandand Portugal – since it launched its intervention program on May 10 as part of themultibillion-euro international bailout.

 All this has resulted in a surge in the risk premium the market is asking to hold PIIGS debt which are moving towards their record highs.

 And with Basel III more stringent capital ratios to be discussed at theNovember 11-12 G20 meeting in Seoul, I continue to stay clear from European

 banks.

 Source: 

The Wall Street Journal: Europe's Bank Stress Tests Minimized Debt Risk http://online.wsj.com/article/SB10001424052748704392104575475520949440394.html

?mod=WSJEUROPE_hps_LEFTTopWhatNews

Markets & Beyond: Europe’s banks stress test: not really stressful…http://marketsandbeyond.blogspot.com/2010/08/europes-banks-stress-test-not-really.html

The Financial Times: ECB steps up eurozone bond buyinghttp://www.ft.com/cms/s/0/a70e9b82-bb76-11df-a136-00144feab49a.html

The Financial Times: Portugal suffers as lending costs soarhttp://www.ft.com/cms/s/0/0e3b7f1a-baa9-11df-b73d-00144feab49a.html

Bloomberg: Europe's Banks Stressed By Sovereign Debts Regulators Duckedhttp://www.bloomberg.com/news/2010-09-06/europe-s-banks-stressed-by-sovereign-debts-eu-regulators-failed-to-examine.html

Committee of European Banking Supervisors: 2010 EU Wide Stress Testinghttp://www.c-ebs.org/EuWideStressTesting.aspx