Well, 8 failed the tests.. 8 failing sort of implies there was a test at least.. which is quite possibly the reason why a few have failed.
They are uniformly small banks, mostly in Spain. The capital required to make them pass is a mere 3.5bn usds or around 0.01% of euro annual gdp.
So, in spite of the headline, this should be all very positive.. that is if you believe the test’s methodology. Just by way of an example, this methodology includes treating all euro sovereign debt inc Greece as triple a rated 100% guaranteed assets on the banks balance sheets, inc greek, irish, portugese debt. It excludes off balance sheet derivative obligations and bets (on the assumption that these off balance sheet bets net off in any case). So its all wizard of Oz stuff really, imo.
http://www.bloomberg.com/video/72518100/
Whats more interesting is some of the detail beyond the headlines, inc:
‘The failures were found to have insufficient reserves to maintain a core Tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said. A further 16 banks, including seven in Spain, barely passed with a core Tier capital 1 ratio of between 5 percent and 6 percent’.
And these numbers include the assumptions above re sovereign debt being tier1 capital and triple A rated. If the bailout culture was not in swing almost every euro bank would fail due to their disasterous balance sheets really are. And this is after the ECB’s and sovereign government bank bailouts and asset swap for cash deals of the last few years. Many financial institutions were/are running on wafer thin capital ratios. Its frankly unbelievable..
The irony of how the euro area has implemented the EFSF rescue fund to bailout the sovereign debt issues must not be lost on us. I can’t make this stuff up.. The Euro area bails out the troubled states by creating a new borrowing institution. The EFSF has minimal capital and borrows the bailout money from the markets. This new debt is guaranteed by the ‘core’ strong states inc Italy and Belgium! Its debt on top of debt guaranteed by heavily debt laden sovereign underwriters. The EFSF bonds are rated triple as they are guaranteed. I cannot make a more ridiculous scenario up if i tried. Its no wonder gold and silver are off to the moon. Fiat paper is in the process of becoming toilet paper with such mindless policies by our political and central banker elites.
I’m not sure what this exercise is all about really as no body i have spoken to with any remote interest in finance (or with a gcse in economics) takes this seriously. I can only assume this is for the consumer in the street to encourage systemic confidence and therefore loan growth as well as to prevent runs on banks. It has produced a result in the market with the indexes losing some ground inc the euro (which seems to have stabilized since). PMs moved even higher gold threatening 1600. Banking stocks on both sides of the Atlantic have lost ground, citi now down 2% in spite of the pretty stella nos. Below the news item in bloomberg: http://www.bloomberg.com/news/2011-07-15/eight-european-banks-fail-stress-tests-with-3-5-billion-capital-shortfall.html
I’m in danger of slipping into a rant here so ill stop for now.
Night all..
Rich
(4 votes, average: 5.00 out of 5)
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