Harry Tuttle submits:What is a (banking) stress test?In theory, is an exercise where the bank revalues its assets under one or more adverse scenarios in order to find out whether or not it is adequately capitalized.Complete Story »
Alicia Damley submits:At the end of this week, results of the second European bank stress test exercise begun in March 2010 will be released. Given the EU’s structure, these tests have been finalized by Committee of European Banking Supervisors (CEBS) and the national supervisory authorities, in close co-operation with the ECB.
Spanish bank Banco Santander was halted on Thursday, followed by an announcement it would raise capital. When the bank reopened its shares plummeted as much as 14%, with the Spanish stock market down about 4%. Banco Santander passed the last "stress test" so allegedly it had no need to raise capital.With that thought in mind, let's recap the ECB's love affair with stress tests that seldom find much need to raise capital.
On October 23, ECB president Mario Draghi announced new bank stress tests. At the time, I offered a "Draghize" Translation. Here is a small snip. Translating DraghizeFor those of you who do not speak Draghize I offer these translations.Draghize: "Banks do need to fail to prove the credibility of the exercise".
When it comes to stress tests, especially for European banks, the one thing history suggests is the tests will be essentially stress-free, by design. Why should this time be any different?
Nonetheless, European Central Bank President, Mario Draghi Says ECB Won’t Hesitate to Fail Banks in Stress Tests.
For those of you who do not speak Draghize I offer these translations.
FRANKFURT: The European Central Bank said on Wednesday nine banks it monitors would face stress tests in 2015 in view of their increased systemic significance since its health check on large lenders last year. The ECB said it will carry out stress tests and balance sheet reviews on Belgium's Banque Degroof, France's Agence Francaise De Developpement, J.P. Morgan Bank Luxembourg, Austria's Sberbank Europe and VTB Bank (Austria), Slovenia's Unicredit Banka Slovenija , Kuntarahoitus Oyj (Municipality Finance plc) of Finland and Mediterranean Bank plc of Malta.
Yves here. I have to admit I never focused on what turns out is a blindingly obviously reason why the European bank stress tests are an exercise in optics. Even though this website derided the US stress tests as a cheerleading exercise, and earlier criticized the Administration for failing nationalize Citigroup as FDIC chairman Sheila Bair sought to do, the US authorities were in a position to Do Something about sick banks. Consider the European case (note I consider Yanis to be too charitable toward US bank regulators, but keep in mind that he's comparing them to his home-grown version).
Across the board, we are seeing European bank stocks (most notably Italian) trading halted. The 5-7% plunge in prices - just when everyone is proclaiming victory in Europe - reflects an apparent concern that the tougher-than-expected European bank stress-tests will expose the Italian banks for the bloated sovereign debt issuance soaks that they have become. As Draghi himself noted, in a desparate plea to maintain some credibility "banks do need to fail" to prove the credibility of the exercise, adding "if they do have to fail, they have to fail.
There are somewhat good news for the EU economy today insofar that only 7 of the 91 tested European banks failed their stress tests, coordinated by the European Commission office. The failures are mainly concentrated in Spain and the reason for this may be not so much the bad state of the Spanish economy but the peculiar way the whole exercise was devised.
The results of the UK's bank stress tests are now out. The Co-operative Bank, Royal Bank of Scotland and Lloyds were all told that they need to strengthen their capital. The Co-op Bank also has to submit a new capital plan, meaning it failed the tests entirely. The stress tests were widely considered to be more strict than the European ones that were conducted earlier this year. A one-third crash in house prices was part of the model.