European Bank Stress Test results disappoint

I felt it might be helpful to post some initial thoughts on the European bank stress tests.

1. Seven banks have failed of which five are Spanish. The banks are Germany’s Hypo Real Estate, Greece’s Atebank and Spain’s Espiga, Diada, Unnim, Civica, and Cajasur.

This is simply far too few for the process to have much credibility. It also really stretches credulity that only one Greek bank has failed. The total capital required is only 3.5 billion Euros.

2. The economic scenario where there was supposed to be an impact on economic output was so weak as to be virtually pointless.

3. The scenario for stress testing for sovereign risks on first reading appears to punish prudent banks more than the imprudent in certain circumstances.

Comment

I am sure that a rally in the riskier banks which avoided any censure in the stress tests may well take place. In some ways this rally may well be a better guide than the stress tests as to who has issues. Apart from that they seem to have been a waste of time as the tests were simply too weak. I was afraid that the organisation CEBS lacked real bite and knowledge and this is what has transpired. In addition Spain’s Prime Minister and Finance Minister both said that Spain would come out of these tests well and indeed Elena Salgado said none had failed. So their credibility as witnesses are somewhere around zero I would think.Have a good weekend.

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3 thoughts on “European Bank Stress Test results disappoint

  1. Exactly what one would expect when politicians commission any “tests”, just as when they control the collection and publication of any data?

  2. Elena Salgado really has to learn when not to crow too much. Stress testing of the kind undertaken means very little. There are two main problems in the Spanish banking system right now, lack of liquidity and an absence of proper recognition of the bad and doubtful debts of the Cajas de Ahorro, mainly stemming from the disastrous real estate market. The first is a real problem for all Spanish business and the second will not be resolved until the new rules for treatment of such debts come into force for reporting periods starting with this financial year.
    Meanwhile we have to put up with these PR games from the powers that be. They are beginning to wear a bit thin.

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