09 September 2010

Europe’s bank stress tests: Follow-up

On September 7, the WSJ published an article which outlined why the criteria used for the 91 European banks stress tests minimized the debt risk in their portfolios. In particular it pinpointed discrepancies between data published by the BIS and the stress tests. The CEBS did respond to the article, unconvincingly however. If transparency was real 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 about these politically motivated tests triggered in July in a panicky mood which I expressed at the 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 Greece successfully passed the tests with a 9.6% tier 1 capital ratio in the adverse scenario 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 billion that the 7 banks that failed the tests had to raise… European politicians and regulators are lacking credibility indeed.
  2. Portuguese banks increased their borrowing (+0.6% August/July) from the 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 reliant on the ECB for funding.
  3. In July, the European Central Bank loaned 132 billion euros for three months to 171 financial institutions. ECB President Jean-Claude Trichet on Sept. 2 extended emergency lending measures for banks into 2011. The ECB has bought €61bn in government bonds – mostly of the weaker eurozone economies of Greece, Ireland and Portugal – since it launched its intervention program on May 10 as part of the multibillion-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 the November 11-12 G20 meeting in Seoul, I continue to stay clear from European banks.


The Wall Street Journal: Europe's Bank Stress Tests Minimized Debt Risk

Markets & Beyond: Europe’s banks stress test: not really stressful…

The Financial Times: ECB steps up eurozone bond buying

The Financial Times: Portugal suffers as lending costs soar

Bloomberg: Europe's Banks Stressed By Sovereign Debts Regulators Ducked

Committee of European Banking Supervisors: 2010 EU Wide Stress Testing