While the actual results of the US bank stress tests won’t be released until May 4, today we are getting something almost as interesting – the methodology.
The 30-page report will reportedly be released at 2pm New York time/7pm in London.
While the core economic assumptions have already been made public, there’s still a bit of divergence about the other scenarios, mostly pertaining to loan losses, contained in the tests. For instance, Deutsche Bank has this convenient table comparing the numbers reported by the Wall Street Journal, with the assumptions used by the IMF and the haircuts applied by JP Morgan to WaMu’s books.
Once the methodology and criteria are finally published we could well get analysts publishing the results of their own banking stress tests. FBR Capital Markets and KBW have been doing so even without the full methodology. This could make for some very volatile banking stocks in the coming week as markets await the actual results of the test.
And of course, the US Treasury is walking a fine line here. It has to make sure that some banks fail the test in order to give the entire exercise credibility, but clearly it can’t (and so far certainly hasn’t appeared to) make the stress test criteria too rigorous.
Here’s Deutsche Bank’s fixed income team on the matter:
These write-down numbers will translate into a capital short-fall after some assumptions about earnings have been made. Irrespective of what the final number is, it is clear that the stress test will have to uncover a capital shortfall. This shortfall will either dilute common shareholders, or, be shared out more equally across banks’ capital structure. Either risk we believe is not fully reflected in the price of risky assets. And if the stress test does not result in a recap requirement, this would suggest that the PPIP will be unsuccessful in freeing banks of their distressed assets, thereby risking any recovery in credit creation. The stress test and resulting bank recapitalization plan announcements will therefore impart substantial volatility into markets over the coming two weeks.
Related links:
Stress test results leaked (again) - FT Alphaville
Stresstify - FT Alphaville