Monday, October 27, 2014

28/10/2014: Page 75... ECB Washes Out Its Big Bazooka QE with New NPLs...

In the previous (lengthy) post I covered my view of the ECB stress tests results. But, per chance, you have missed two core points on these, here they are, in a neater summary:

Point 1: Stress tests are weak compared to expectations and independent analysts' estimates of capital shortfall (by a factor of up to or in excess of10:1).

Point 2: Stress tests have raised non-performing loans levels in the euro area banking system by EUR136 billion to EUR879.1 billion or close to 9% of the euro area GDP. The increases were recorded in all categories of loans, which in simple terms means the banks have been under-providing for loans losses across all categories of their core assets.

Now, that puts into perspective the ECB's 'big game all-in' shot for TLTROs and ABS purchases targeting to raise ECB balancesheet exposures by... you've guessed it... EUR1 trillion.

Why, despite improving asset markets, stoic rhetoric of deleveraging and historically low cost of central banks' funds, the NPLs are climbing... and by the end of the ECB's big bazooka firing, that EUR1 trillion is probably will be just about enough to cover the outstanding NPLs. Assuming economy does not tank any more, in which case, it might fall short.

Update: Here's WSJ Blogs analysis of the effects application of the tougher quality tests for Core Tier 1 capital would have had on ECB stress test results:

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