The stress test results are out now and seven European banks have failed – five Spanish banks, one already failed German bank and one Greek bank. Over the next few hours and days, investors will digest the considerable information put out by the Committee of European Banking Supervisors and decide whether they agree with the following conclusion from CEBS.
The aggregate results suggest a rather strong resilience for the EU banking system as a whole and may appear reassuring for the banks in the exercise, although it should be emphasized that this outcome is partly due to the continued reliance on government support for a number of institutions.
If investors are similarly reassured, it should ease pressures in bank funding markets and limit the chances of a further liquidity squeeze on European banks. If not, the exercise could backfire. Read more
Stress testing could become an institution in itself. Adair Turner has told reporters he expects authorities to move toward annual stress tests, which would be made public, and behind them tests of specific institutions running on a rolling basis. The head of the FSA also repeated his assertion that British banks would fare well under European stress tests, and that those tests would be sufficiently stringent. His reasoning, though, will not comfort markets.
First, Lord Turner describes the European tests as “adequate” rather than, say, “stringent”. And second, his confidence in British banks is founded upon private scenarios run by the FSA last year, which he describes as “more extreme” than those planned by Cebs, Reuters reports.Read more
July 23: stress test result day, right? Wrong. Consolidated results are now to be released on that date, with individual banks’ results delayed by two weeks. Cue a fortnight of frenzied speculation in the markets, as investors try to work out which banks are at the vulnerable end of anonymous bar charts and scatter plots. Presumably this has been done to allow banks more time to raise equity. But then, after two weeks of volatility, even some banks that have fared well will be needing it!
This decision seems to miss the point that stress tests are all about shoring up market confidence. Even bad results can be taken well by markets if investors believe the scenarios are accurate, transparent and really do consider the worst possible situation. Indeed, equity markets rose after the SCAP results from US stress tests last year. But then US markets could have the ultimate confidence in their banks, because the US government had pledged to bail-out any banks subsequently unable to raise funds through the markets. European banks – at this point – come with no such guarantee. Read more
We’ve got details on purpose and sample, but methodology is thin on the ground. See the table: there are two scenarios and at least five variables, but only one of the ten resulting methods is supplied. Sigh.
The aim of the tests are described in the statement:
1) to assess the banks’ ability to absorb further shocks on credit / market risks, including sovereign risks;
2) to assess current dependence on public support (read: can we exit safely yet?) Read more
There is a lot going on behind the scenes in German banking circles to prepare for the publication of Europe-wide “stress test” results later this month. German banks were always the most opposed, for a mixture of principled reasons (they are a bit of a PR gimmick) and fears about what they would reveal.
But the exercise is not only a test for the banks themselves. It is also a challenge for Axel Weber, the Bundesbank president who is tipped as a possible successor to Jean-Claude Trichet, when the European Central Bank president’s non-renewable eight year term expires in November next year. Read more
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: Read more
Name a small country exposed to a large banking sector. No, not Iceland. Belgium, courtesy of Fortis and Dexia.
So is Belgium most at risk from the EU’s new commitment to stress test transparency? Possibly, says Jacob Funk Kirkegaard in an article for the Peterson Institute. But that would be a small price to pay: Read more
** corrected at 16.40 to read “in the near future” instead of “next few days”
Spain’s central bank has thrown down the gauntlet to bank regulators elsewhere in Europe, saying it plans to publish the results of “stress tests” on the country’s financial institutions in the near future to clear up doubts about Spain’s banking system. (Berlin has also dropped resistance to the plan.) Read more
Chris Giles has been the economics editor of the Financial Times since 2004. Based in London, he writes about international economic trends and the British economy. Before reporting economics for the Financial Times, he wrote editorials for the paper, reported for the BBC, worked as a regulator of the broadcasting industry and undertook research for the Institute for Fiscal Studies. RSS
Michael Steen, Frankfurt bureau chief, covers the ECB and the eurozone's economies. He joined the Financial Times in 2007 as Amsterdam correspondent and later worked as a front page news editor in London. Before joining the FT, he spent nine years as a correspondent at Reuters, mostly in foreign postings that included a previous stint in Frankfurt, as well as Moscow, Kiev and central Asia. He read German and Russian at Cambridge.RSS
Robin Harding is the FT's US economics editor, based in Washington. Prior to this, he was based in Tokyo, covering the Bank of Japan and Japan's technology sector, and in London as an economics leader writer. Robin studied economics at Cambridge and has a masters in economics from Hitotsubashi University, where he was a Monbusho scholar. Before joining the FT, Robin worked in asset management and banking. RSS
Ralph Atkins, capital markets editor, has been writing for the Financial Times for more than 20 years following an economics degree from Cambridge. From 2004 to 2012, Ralph was Frankfurt bureau chief, watching the European Central Bank and eurozone economies. He has also worked in Bonn, Berlin, Jerusalem and Brussels. RSS
Claire Jones is Money Supply economics team writer, based in London. Before joining the Financial Times, she was the editor of the Central Banking journal and CentralBanking.com. Claire studied philosophy and economics at the London School of Economics. RSS