Stress Tests

As the dust settles around Friday’s European bank stress tests, and analysts begin poring over the wealth of new bank data, it’s hard to find anybody in the financial markets who was impressed by the toughness of the exercise. On the other hand, it’s hard to find evidence so far of investors caring that much either. They seem to have moved on.
Speaking on the BBC’s Newsnight program, Terry Smith, chief executive of Tullett Prebon, likened the stress tests results to somebody shooting an arrow and then painting a target around where it landed.
Here, Steve Slater and Edward Taylor of Reuters, say the focus will shift away from the seven banks that failed the tests—holding less than 6% of Tier 1 capital in the most adverse scenario–to the 17 that only just passed.


They say the banks whose Tier 1 capital ratio was between 6% and 7% “included Deutsche Postbank, Greece’s Piraeus Bank, Allied Irish Banks, Italy’s Monte dei Paschi di Siena and UBI Banca, Spain’s Bankinter and eight smaller Spanish banks.
“Even in the hours before the results were released National Bank of Greece, Slovenia’s NLB and Civica in Spain all announced plans to raise capital.”
Marco Annunziata of Unicredit was among many who pointed out that the main weakness of the tests was their treatment of sovereign bonds, in particular that a fall in prices was applied only to those bonds held in banks’ trading books—not in the banks’ loan books. Like others though, he says that the release of data by national regulators on sovereign bond exposures should allow analysts to work out for themselves where vulnerabilities lie.

He also focuses on Spain.

“One positive aspect is that most of the action appears to be in Spain, home to five of the seven banks that have failed the tests, confirming the impression that Spain is moving fast to bolster its banking system (albeit, here again the extent of the shortfall is significantly less than even the more optimistic expectations in the market).
“As I have argued before, Spain is the lynchpin, and to the extent that it gains further market confidence, this will help reduce significantly the risk of systemic volatility in the eurozone.”

Gary Jenkins at Evolution Securities writes:

“My view is that whilst the stress tests do not take into account the worst case scenario of multiple sovereign failures, we know what the impact of such a disastrous backdrop would be anyway; that is a complete collapse of the western world’s financial system!
“The EU governments will not allow banks to actually fail in the market, thus it is the sovereign bond market that is key in the short term, because there is not anyone who can bail out the governments (aside from printing money). Thus within a week I think the stress tests will be forgotten and the market will be focusing on the earnings season and economic data.”