Sunday, October 26, 2014

ECB provides a sobering but sunny stress test for eurozone banks #ecbstresstest

The ECB seems to be putting an optimistic spin on the results of a "stress test" applied to the state of major banks for the year 2013. The ECB formally assumes oversight for European banks in November. Euronews reports in One in five major European banks fail ECB's first stress test 10/26/2014:

Claire Jones and Alice Ross report for the Financial Times (ECB says banks overvalued assets by €48bn 10/26/2014):

Of the 25 banks that took the biggest hit under the AQR, Italian banks were the clear laggards with eight members, according to calculations by Strategy&, a consultancy. The worst hit was Monte dei Paschi di Siena.

Four Greek banks, three from Austria and two each from Cyprus, Slovenia, and Spain were among the 25 banks who will face the biggest write downs.

German lenders will have to lower the value of their assets by €6.7bn and their French counterparts by €5.6bn.
Overvaluation of assets is a huge problem. "The central bank blamed poor valuation of commercial loans for a chunk of the adjustments."

One of the major factors in the draconian measures that German Chancellor Angela Merkel has insisted upon in the sovereign-debt aspect of the euro crisis has been based on an unwillingness to face the general weakness of the European big banks, including in Germany.

In Austria, the Österreichische Volksbanken AG (ÖVAG) was the only was that was considered to have failed the stress test. Which means that it was likely to go under in a serious three-year economic decline. Two other major Austrian banks, Erste Bank and Raifeissen, were both found to be significantly under-estimating the risk levels on loans in their portfolios, which overvalued their assets. And with a overestimation of assets, capital reserves can be inadequate to the real, risk-adjusted value of the portfolios.

The Euronews report implies that the worry over weak banks would be that in a downturn, they would have inadequate credit to lend to businesses. Which is true as far as it goes.

But that's kind of a tip-of-the-iceberg way of defining the problem. If major banks start failing, national states are responsible for bailing them out. And that requires huge outlays at a time when the economy is declining and government revenues are falling. That means more debt. Including in a country like Greece, which already has an unpayable level of debt, currently at around 175% of GDP.

It's not an abstract possibility. Not only is the eurozone slipping into a new recession within the depression that began in 2008. This scenario is how Ireland became one of the debt crisis basket cases. When Irish banks started failing after 2008, the Irish government borrowed heavily to bail out their banks. A similar scenario occurred in Spain.

Gerald Braunberger notes that in Germany, the ECB tests raised concerns - presumably he means among banks and in government circles - over the oversight role of the ECB. (Der Test allein macht die Branche nicht gesund Frankfurter Allgemeine Zeitung 26.10.2014) Merkel's nationalistic policy includes Germany having a dominant role in eurozone economic policy but without being subjected to the inconveniences of common responsibility and regulation on the part of the larger eurozone, ECB or EU.

Braunberger argues that the ECB designed its stress test to minimize the bad news:

Das Ergebnis ist in etwa so ausgefallen, wie es zu erwarten war. Die EZB konnte angesichts der fragilen Verfassung vieler Banken nicht alle Institute den Test passieren lassen, ohne sich von Beginn an als Bankenaufseher selbst zu diskreditieren. Hätte sie andererseits zu viele Banken scheitern lassen, wäre möglicherweise große Unruhe unter den Kunden entstanden – mit eventuell drastischen Folgen. Solche Bankentests sind keine reine Übung in angewandter Mathematik. Sie besitzen auch eine politische Dimension und dies schmälert natürlich ihre Aussagekraft.

Gleichwohl kann nicht erstaunen, dass die meisten der durchgefallenen Banken im Süden Europas beheimatet sind. Dennoch sollte sich keine Bank ausruhen, nur weil sie den Test bestanden hat. Dies gilt auch für die deutschen Kreditinstitute, die bei genauerem Hinsehen keineswegs alle sehr gut abgeschnitten haben. Die Bundesbank hat in ihrer Kommentierung der Stresstest-Ergebnisse zurecht auf weiterhin vorhandene Schwächen hingewiesen.

[The result is some ways came out as was to be expected. In light of the fragile constitution of many banks, the ECB could not let all the institutions pass the test without discrediting itself from the start as the overseer of banks. On the other had, if it had made too many banks fail, great unease could have arisen among customers - with possibly drastic consequences. Such bank tests are not a pure mathematical exercise. The also have a political dimension and this diminishes their conclusiveness.

At the same time it cannot be surprising that most of the banks that failed are headquartered in the south of Europe. But it shouldn't comfort any bank just because they passed the test. This is also the case for German institutions, which on closer examination by no means all look good. The [German] Bundesbank in its commentary on the stress test results has rightly emphasized broadly present weaknesses.]
Braunberger is suggesting that the ECB's approach in the stress test was something like this:

Laura Noonan and Eva Taylor report for Rueters in ECB fails 25 banks in health check but problems largely solved 10/26/2014 on the ECB test, the headline accentuating the positive. Their report highlights the southern European banks designated by the ECB as particularly problematic:

Painting a brighter picture than had been expected, the ECB found the biggest problems in Italy, Cyprus and Greece but concluded that banks' capital holes had since chiefly been plugged, leaving only a modest 10 billion euros ($12.7 billion) to be raised.

Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds.

The test, designed to mark a clean start before the ECB takes on supervision of the banks next month, said Monte dei Paschi (BMPS.MI) had the largest capital hole to fill at 2.1 billion euros. ...

Alongside Italy, regulators said three Greek banks, three Cypriots, two from both Belgium and Slovenia, and one each from France, Germany, Austria, Ireland and Portugal had also missed the grade as of end-2013.

1 comment:

jo6pac said...

There should be a pool on what day the bail-ins will start in the EU then making across the pond to Amerika.