Several banks are likely to need to raise fresh capital, if European stress tests are anything like their American predecessors a year ago (see chart, right). The key question for the resulting stability of the banking sector is what the market has already priced in.
This time last year, US stress tests were published. Bank of America came off worst, needing $33.9bn more equity (though in the days following, its share price rose).
After the tests, US regulators ordered 10 of the largest banks to add a total of $75bn in equity, resulting in share sales, conversion of preferred stock and the occasional debt sale too.
Below is a list of the top 25 European banks by assets under management, as food for thought over the weekend:
Is it ECB reluctance to buy sovereign bonds that is shaking markets’ faith in Greece?
Insuring against default on Greek debt is again at an all-time high, closing yesterday at 1,012 and apparently passing the 1,100 mark today. These levels surpass even those in May, which prompted a €110bn bail-out, followed by a €440bn Europe-wide fund.
There is plenty of cash, clearly, but Ralph has often warned of ECB discomfort with the bond purchases. Is the market taking falling bond purchases as a lack of commitment? And, if so, would Greece have been better off without the policy?
The exceptionally strong correlation of -98 per cent is noteworthy (caveat 1. correlation is not proof of causation; 2. this is based on just six weekly data points). The figure is the correlation between the average Greek CDS price over a week (from Markit) and weekly ECB bond purchases (from SocGen).
The real test
Today, for the first time, the midpoint set by Safe exceeded the 0.5 per cent tolerance bands set around the original exchange rate of 6.8275 – by half a basis point.
Not as historic as many expected at the start of the week. But then ‘flexibility’ does not mean ‘strength’: a flexible exchange rate can go up or down. Geoff Dyer, the FT’s China bureau chief, points out that domestic and international takes on the new policy differ greatly – principally because their desires differ greatly. Internationally, a stronger yuan is wanted. Domestically, the “export lobby is welcoming [flexibility] as a way of protecting itself from a weaker euro.”
China’s new policy has not completely ruled out the prospects of a political showdown. The obvious flashpoint is if the euro does weaken substantially again.
The European Central Bank seems confident it will next week manage, without incident, the biggest ever repayment of liquidity in its 11-year history. A year ago it provided €442bn in one-year loans to 1,121 eurozone banks as part of its emergency measures to shore-up the financial system — the largest amount ever provided in a single ECB liquidity operation. On Thursday, all the money has to be repaid.
Earlier this year the worry was of tensions rising as the repayment deadline loomed. As part of its ‘exit strategy’, the ECB governing council, which met yesterday for a regular non-monetary policy meeting, dropped one-year liquidity offers.
A common assumption is that overnight market interest rates may still rise as the €442bn is repaid. But the euro’s monetary guardian has taken steps to smooth the process, and any impact on market interest rates could well be modest. On Wednesday, the ECB will meet in full banks’ demands for three month liquidity, and then on Thursday itself, the ECB will offer unlimited funds for six days, which will tide banks over to the following week’s regular offer of seven days funds.
£2bn, €1bn… and $19bn. Proposed bank levies so far from the UK, France and US. The tide of ever smaller bank levies appears to be turning.
American banks with assets exceeding $50bn and hedge funds with assets over $10bn would be liable to pay the costs associated with financial reform. This from a proposal by Barney Frank late last night during discussions to finalise Wall Street reform. More on ft.com.
A sharp decrease in market functioning is noted by the Bank of England in its latest Financial Stability Report.
US government bonds were the only primary market — out of 15 — described as ‘functioning’ in May; eight were described as impaired. The month before, eight were functioning and two were impaired. Highly recommend a closer inspection of the table to the right – though even at a distance, you get the idea.
Commercial property is the biggest headache globally. Indeed, the housing market as a whole makes an appearance in two of the six key risks noted by the Bank:
- Exposure to european sovereign debt;
- A sustained reversal in investor risk appetite;
- Investors divesting Europe, buying Asia;
- Defaulting borrowers, esp. commercial property;