Did stress-testing the sovereign exposures of European banks help soothe the market?
On Monday July 26, shortly after results of the tests were published, the analysts at RBS came up with seven indicators that might suggest whether the exercise had ‘succeeded’ in terms of sentiment.
They’ve now published an update — with data up until Friday July 30.
In brief, all but one of the indicators seemed to point to success rather than failure. The three-month Euribor/OIS spread — the indicator of risk in the banking system according to RBS — pushed higher.
(For those interested, as of Tuesday the spread is still hovering around 34 basis points — even after Euribor fell slightly on Friday). In charts, the indicators performed like this in the first week:
But, as the RBS analysts noted in their original (July 26) take on the stress tests, and as the ‘first week’ in the headline should suggest — they’re rather more doubtful of the tests’ longer-term success.
Here’s what they say:
In our initial reaction the European Stress Tests – European bank stress tests: a missed opportunity – we argued that we would see a short-term positive reaction, but that medium-term this had done nothing to deal with fat, very scary, tail risks. So far so good, the initial market reaction mostly seems to be pretty positive.
One important thing to discuss at the beginning of this note is the importance of the Basel 3 amendments. The BIS proposed revisions are a game changing moment for the European banks’ sector cost of equity. We justify this on the observations that the implementation timeline has been pushed out to 2017; ratio definitions have softened; and, for the leverage ratio at least, a target 42x equity / asset is much more lenient than the c20x that we have been factoring into our forecasts. (The definitions here are not exactly comparable, but the asset gross up under BIS3 looks to be materially less than was originally proposed.)
We still believe that the stress tests were a missed opportunity, but we should note the Basel developments, and the positive effect that they have/will have on some of our criteria for success, most obviously the equity price of the banks sector in the Eurostoxx 600.
Perhaps the Basel-based banking stress tests can be next.
Related links:
Interbank market to ΄decide΄ on M&A - Capital.gr
Stress tests help boost Europe bank funds – FT
Monday funding fears – FT Alphaville