Let the stress test analyses commence…
Aside from the their acceptance of “mitigation” measures taken by the tested banks, one of the big criticisms European Banking Authority’s stress tests is the rather mild sovereign scenarios they considered.
The tests were never going to satisfy sceptics on sovereign defaults, as Société Générale’s global cross-assets team notes, generously adding:
The EBA was effectively in a lose-lose situation: too few failures and the test is branded too lenient; too many failures and some will worry that the system is in worse shape than they had expected.
The SocGen analysts ran their own version of the tests, using the banks’ disclosures in the EBA’s release, to model a 50 per cent haircut on sovereign Greek, Irish and Portuguese bonds, plus another that added a 20 per cent haircut on Spanish and Italian holdings.
Here’s how the latter would look (the scenarios were only applied to the 40 largest, listed banks in the stress tests):
And here’s both scenarios, plus the EBA’s ‘Adverse’ scenario:
Actually, it’s not so bad, they write:
Looked at from the opposite perspective, we are surprised by just how resilient some of the banks are. Despite an economic recession (adverse scenario), a triple sovereign default and 20% haircuts on Italian and Spanish sovereign debt, the average core Tier 1 ratio for our subgroup is a still relatively healthy 6.2%. Furthermore, most of the larger banks have ratios in excess of that average.
And they’re not alone. The FT also notes that the good pass marks obtained by some of the big Italian and Spanish banks may relieve funding pressures for them:
“The results draw a distinction between those banks that have unquestionably strong funding and capital and those that don’t,” said Daniel Davies, banks analyst at Credit Suisse.
According to Mr Davies and other analysts at Credit Suisse, BBVA, HSBC and Intesa still top the list when more realistic sovereign stress models are factored in. However, questions persist over the quality of the data used in the test, including patchy disclosures from some banks of their country-by-country credit exposures.
That’s not to say everything’s peachy in the eurozone.
As FT Alphaville has written before, it’s perhaps the bailouts themselves that should be stressed for a credible test. Both Credit Suisse and SocGen analysts have pointed this out separately. For example, from Bloomberg:
“The EBA are stress-testing the wrong thing,” said Hank Calenti, a bank strategist at Societe Generale (GLE) SA in London in a telephone interview. “They need to be testing the ability of theeuro zone to support its banks. It’s firstly a question of the ability of the sovereign to bail out the banks, and then who is going to bail out the sovereign.”
Credit Suisse, for its part, found – unsurprisingly — that a real default on Greek, Irish or Portuguese debt would cause those countries’ respective banking systems to fail.
Related links:
The unstressed tests, and Italy’s bonds – FT Alphaville
Stress testing bailouts, not banks - FT Alphaville
Citi joins the European stress test jamboree – FT Alphaville