Tuesday, July 20, 2010

Economics 20/7/10: EU test - have a Pass grade before you turn up for a check...

Per Bloomberg report today: “Hypo Real Estate Holding AG, the commercial-property and public-finance lender taken over by the German government, failed a Europe-wide banking stress test, two people familiar with the results said.” Crucially, however, “the Munich-based lender is probably the only German bank to fail the test, one person said.”

Makes you wonder – what kind of test is that if out of 91 not exactly rude-health institutions, only one is expected to fail? At an expected 99% success rate, the EU stress test is clearly designed to put a PR spin on banking sector shares, bonds and interbank credit markets.

The only sticky part is that if any of the ‘passed’ banks fail in the near future, the investors should be able to sue the EU for any losses incurred. You see, the EU stress test is designed – at least in theory – to provide important markets-relevant information to investors. If so, someone should be liable for the quality of the test. Had the EU authorities given this a thought?

The test is farcical. And you don’t need to see the results to know this much. European banks are set minimum requirement of 6% Tier 1 capital ratio. This is the number being tested. But the US banks had this requirement 2 years ago, and since then have beefed up their capital ratios to well in excess of 9%. UK banks are now in excess of 10%. Where does this put the Eurozone with its banking system ‘tested’ to 6%? In a circus terminology – with the clowns, large shoes, red noses and curly wigs in place. So the EU regulators’ decision to put some more powder over their mugs wont be doing much good.

FT blogs' Tracy Alloway reported today on what the markets think. The article (linked here) reports that there has been a 50% or more rise in the short positions held against a number of Eurozone banks. Ireland’s sick puppies – BofI and AIB are actually most active on long investors’ lists with long positions up ca 20%. But the two are also amongst the most expensive securities to borrow. In other words, it does seem like shorts are heavily on the side of Ireland Inc’s grand dames.

Funny thing, relating to the stress tests, is that a number of public officials – from Greece, to Belgium to Ireland – have already been leaking heavily the ‘news’ that stress tests will clear their banks’ names. One wonders if there is anything else the EU can do to make the whole exercise even more farcical?


Anonymous said...

I guess a summary would be that NAMA has overpaid for assets and the banks remain undercapitalised.

This process has therefore failed in its objectives.

The other side of the equation is the funding side through NAMA and Sovereign bonds requires the payment of higher bond yields.
The fiscal backstop to these bonds is tax revenue and that is also still in decline.

So both sides of this balance sheet; the recapitalisation of the banks along with overpayment by NAMA for loans versus increasing bond yields along with declining tax revenues are covered in red ink.

Cant see any hope there.


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Unknown said...

When the greek banks pass, we'll know the stress test has failed.

Anonymous said...

Peter Mathews Says:
July 27th, 2010 at 12 mid-day
The “Pass” Results for AIB and BoI in the EU Capital Stress Tests are very misleading….bordering fanciful, almost absurd!
Consider….If AIB and BoI are indeed so well capitalised, then it should be very easy, at this stage, for the Irish Government to remove the State Guarantee on Customer Deposits.

I think you’ll agree that, if the Government at this point even reduced the Guarantee on Deposits to a Deposit ceiling of €100K , there’d be an instant huge rush to get Deposits out of the banks!
So much for the Banks being well capitalised!
Stress Test Eurocrats…. GET REAL!!!

In the case of AIB, the EU’s Capital Stress test assumed AIB raising the €7.4bn required re-cap by this year-end. This is more smoke and mirrors!
But what’s new?! The Government has a proven 100% preference for mis-information and untruths!
The Eurocrats might have considered giving both Banks the following new Grade… fianna “FAIL” !!

By the way AIB’s correct immediate min re-cap requirements are €10bn (not €7.4bn stated by the Minister and the Central Bank and Head of Regulation in March 2010, based on Loans assets information supplied by the Bank at the end of 2009 and very early in 2010 which we now know was unreliably optimistic).)
And BoI’s correct immediate min re-cap requirements are €6.5bn (not the €3.65bn stated by the Minister and the Central Bank and Head of Regulation in March 2010, based on Loans assets information supplied by the Bank at the end of 2009 and very early in 2010 which we now know was unreliably optimistic).)

Gambino State said...

3 month Eurobor is still climbing so it appears that whoever this stress test may have been designed to beguile,the banks themselves are not exactly exuding trust towards each other.

TrueEconomics said...


Fungus the Photo! said...

This exercise was obviously not as stated. It has revealed stark differences between coutries and this will affect the risk premium on loans to sovereigns within the EU. It enables those who supply the money to charge more.... get the picture? Very successful, therefore! Many would be suppliers frightened off and those who will able to increase the interest rate!

Irisheconomy.ie have banned me from posting. No reasons given. Guess they could not take what I was saying and that it cut across interests of theirs? Any ideas?

TrueEconomics said...

TBH - I never post on Irisheconomy - not my cup of tea...