Stress tests in Europe maybe aren’t the mugging by reality they used to be… they’re putting up a little bit more of a fight this time. Though how much?
Here’s Citi cruelly putting the European Banking Authority’s recently released methodology against the US’s CCAR:
In the EU, the proposed adverse scenario leads to an overall cumulative deviation of EU GDP from its baseline level by 7.0% over the 3-year period to end-2016, with EU unemployment deviating by 2.9% versus the baseline scenario. This would imply a cumulative real GDP decline of -2.1% over 3-years, notably less than the stress applied in the US CCAR (a -4.75% decline over 15 months) and a peak unemployment rate of 13.0% versus US CCAR 11.25%. Equity prices are expected to decline by 19% relative to the baseline (US CCAR -50% decline), residential house prices by -21% (US CCAR -25%) and commercial property prices by -15% (US CCAR -35%).
Also, no deflation in the EU adverse scenario? Read more
This is one way to respond to the mess Euroland is in over who should make the calls for recapitalising banks…
The European Banking Authority is delaying its next banking stress test to 2014, to wait for both new asset-quality reviews and the ECB’s Single Supervisory Mechanism (so is it to wait for Wolfgang Schaeuble?): Read more
The ESMA-EBA published their report on the administration and management of Euribor on Friday. Among the outline of the now familiar shortcomings of such benchmarks were tables demonstrating basic operational failures, e.g. fat finger errors by panel banks… Read more
Yeah, we knew the LTRO-inspired rally would make it easier for European banks to start closing the gap between their capital ratios and those required by the EBA – or at the very least, as in the case of Commerzbank, embolden them to announce big plans for doing so.
The EBA — remember all that tough talk last October about monitoring banks closely to make sure the recap was asset sales-light and capital raise-heavy? — is amusingly eager to disavow credit for any recent improvements. Just banks doing their thing, especially if by “their thing” one means “breathing easier now that they’re allowed to pledge dirty skivvies to fund themselves, and shareholders are off their backs for the moment”. Whatevs. Read more
No deleveraging because of our recapitalisation exercise, really — or if there is, you’ll hardly notice it. So says the European Banking Authority in a Thursday night release:
(Warning: pie charts follow) Read more
Courtesy of the Credit Strategy team at SocGen on Friday, the following trade idea:
Buy Barclays 5-year senior or sub CDS vs the iTraxx Main: Barclays is one of the largest sellers of CDS on European sovereigns, according to EBA data, and its CDS is trading at close to five-year lows relative to the iTraxx Senior financials. As such, we believe the best way to position for a possible CDS event on Greece is via Barclays. Read more
Back in October 2011, James Ferguson, banking analyst at Arbuthnot Securities, warned that the EBA’s tough new capital rules could be about to make the eurozone crisis a whole lot worse because the absence of fresh capital meant banks would have no other choice but to contract their assets.
Or as he wrote: Read more
Shares in Commerzbank were up about 11 per cent at pixel time. It’s generally a strong day for European banks as well, but we suppose (bemusedly) it’s following this statement from the German lender on its €5.3bn capital hole…
The capital requirement in accordance with the EBA methodology could be reduced by the end of 2011 from EUR 5.3 billion by EUR 3.0 billion thanks to risk-weighted asset reduction (Core Tier 1 relief approximately EUR 1.6 billion), a reduction in regulatory capital deductions (some EUR 0.2 billion) and retention of earnings in the fourth quarter 2011 (approximately EUR 1.2 billion). As of year-end 2011 Commerzbank has thus already fulfilled 57 % of the EBA capital requirement. Read more
A rough ride for UniCredit shares, and rights to buy its shares as part of the bank’s €7.5bn cash call, on Monday — they fell, got suspended limit down, and are dropping again (down 6.4 per cent) at pixel time.
It’s the rights’ first day of trading, so it’s worth asking why it’s so volatile. Read more
In a note released on Tuesday, GMO, the global asset management firm headed by Jeremy Grantham, writes that ”European banks need tons of money” to correct capital shortfalls. This much, we know.
But the five scenarios used by Richard P. Mattione, the firm’s head of macroeconomic research, for why banks will need to raise much more capital should prove familiar to FT Alphaville readers. Mattione uses data from the July EBA tests and July BIS data, so be warned. In fact, there are a few points here that seem to be behind the results of the latest EBA efforts. Read more
Update – FT Alphaville has heard that the answer to this question is in fact… yes. See below for more details.
The official EBA numbers on European bank capital shortfalls are out. In aggregate it’s €114.7bn. Read more
Updated — We’ve added a bit more on how the EBA might treat convertible bonds as part of the capital targets. Also see the FT’s reporting on the issue.
The key chart from the European Banking Authority’s release late on Wednesday night (featuring as its target the widely trailed 9 per cent Core Tier 1 capital rato for banks): Read more
It gets worse here every day, et cetera.
The FT’s Peter Spiegel has a bit of tonight’s draft eurozone statement as it pertains to bank recapitalisation: Read more
Are you confused by the ‘facts’ and figures on the latest bank stress test?
These charts (click to expand) from Morgan Stanley’s Huw Van Steenis should help. Read more
A headline like that can only mean one thing — another rant from Europe’s Dick Bove.
In Friday’s note, Evolution’s Ian Gordon slams regulators, the press and his peers for their stupid coverage of his beloved RBS. He even goes as far as to call for an FSA investigation into recent coverage of the bank! Read more
Just like the good old days. A Pestowire ‘exclusive’ on banking recapitalisations.
From the BBC: Read more
(Reuters) European Union banking regulator EBA has demanded that lenders achieve a core tier one ratio of at least seven per cent in the current round of internal stress tests, banking and regulatory sources told Reuters on Tuesday.
It remains unclear whether capital that qualifies as core tier one will be defined according to rules known as Basel III, or whether an earlier version, known as Basel 2.5 will be applied, these sources said… Read more
A predictably furious response from RBS to the FT’s front page splash on Friday. Read more
Or the trouble “reviewing bank capital positions” — euphemism du jour from the European Banking Authority.
The EBA’s denied on Thursday that they’ll do actual new stress tests on banks in order to model bigger write-downs of peripheral sovereign debt and possibly identify where more capital is needed, as the FT reported. This worries us regarding how useful any EBA input will be. Read more
Europe’s top banking regulator is drawing up options to help banks in Europe struggling to tap credit markets for medium- and long-term funding, the FT reports. Among the policy proposals being considered by the European Banking Authority is a new guarantee scheme for bank bonds, a controversial measure that would require the eurozone’s €440bn bail-out fund to be given new powers. The EBA proposals are expected to be presented to a meeting of senior European officials next week. Even before submitting its analysis, however, the EBA is facing stiff resistance from some member states unwilling to reopen a deal struck last month, which would give the bail-out fund – formally the European financial stability facility – new but less expansive powers.
Deferred Tax Assets (DTAs) have been mentioned (usually critically) on this blog many times before. Put very simply, they are tax carryforwards that can be included in banks’ Core Tier 1 capital ratios.
Unsurprisingly then, they make quite an appearance in the recent European stress tests. Read more
It’s not hard to criticise the methodology of Europe’s stress tests.
From the inclusion of mitigating factors not yet undertaken by banks, to the lack of a full sovereign default, you can take your pick, really. With that easy target-ness in mind then, we thought we’d mention one more, just because it hits on a wider weakness in bank results and accounting. Read more
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. Read more