Posts tagged 'Stress Tests'

Greece shows ECB’s stress tests were nonsense

Remember the Comprehensive Assessment? You know, the European Central Bank’s report in October 2014 that said three Greek banks were adequately capitalised to survive a stressed scenario thanks to their fundraising efforts earlier in the year, while the fourth was only off by five basis points?

We ask because the ECB seems to have forgotten. Otherwise, we can’t think of why the euro area’s central bank is choking off Greek lenders and effectively forcing the Greek government to impose capital controls. (Immense thanks to Karl Whelan for making this point at our panel at Camp Alphaville.)

To see the oddity, it helps to explain what central banks are for. Read more

How to regulate banks: crazy like a fox

People don’t like it when banks default on their obligations, because lots of people use those obligations as money. Think of deposits, or commercial paper sold to money-market mutual funds. The problem is that, absent offsetting regulations, government guarantees preserve the value of these forms of money at the cost of transferring wealth to bankers and — to a much lesser extent — bank shareholders, while also encouraging excessive lending.

The $50 trillion question is: how can governments protect the savings of their citizens without creating new problems?

We want to revisit this question because of two events from last week. The big US banks managed to roll back a provision of the Dodd-Frank financial reforms by entangling their policy change in a government funding bill. (Citi lobbyists literally wrote the key passage of the law.) And we got to attend a fascinating discussion on the regulatory value of stress tests. Read more

Now that that’s over…

Mario Draghi probably wasn’t expecting that his July 2012 comment that “the ECB is ready to do whatever it takes to preserve the euro” would coincide with the start of a relentless drop in bank lending to nonfinancial businesses far worse than what occurred during the first wave of the recession:

At least some of this decline can be explained by the lack of demand for credit in an environment of stagnant growth and relatively high real interest rates. But the robust growth of the euro-denominated corporate bond market — up by more than half since the start of 2009 — suggests that problems within the banks are also to blame. Read more

Stressed, tested, rested

The results of the ECB’s Asset Quality Review are in. As ever it was the taking part that counted, we’re all winners here. Were you minded to look for losers, however, here’s the FT:

Italy’s central bank was thrown on the defensive on Sunday as its banking sector emerged as the standout loser in health checks aimed at restoring confidence in the euro area’s financial sector.

Nine Italian lenders fell short, out of 25 banks mainly in Europe’s periphery and Germany that need more capital following the stress tests. The general reaction, however, seems to be that the whole exercise is credible, without unpleasant surprises, and that we really need to talk about lending. Read more

For some European banks, Monday can’t come soon enough

Some perspective amidst the angst:

And proving perspective and angst aren’t mutually exclusive, some words from Alberto Gallo of RBS (our emphasis): Read more

We’d prefer to be compared with our previous attempts, thanks very much

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

I, Claudius, caller of bank bonds

Claudius was a Roman emperor from AD 41 to 54.

Claudius notes are Tier 1 instruments that were issued by Credit Suisse back in 2010 and which feature a call date that first comes into effect in December 2015. Except, as bank bond investors have experienced from time to time, the issuers of such securities have an unnerving tendency to sometimes behave unexpectedly. Credit Suisse made some noise when it released earnings last week that it may call the Claudius bonds thanks to something known as a “regulatory par call.” Read more

Stress-testing European banks, 2014: now with “additional national sensitivities”

…. are being answered. The European Banking Authority has graced us with the “key features of the 2014 EU-wide Stress Test”. You can find them here and the FAQ hereRead more

Computing the bill for European taxpayers, come the next crisis

Pity the French…

 Read more

Whose overconfident banks are these?

Here’s a list from the Federal Reserve of good and bad practices by bank holding companies tasked with planning how to stay capitalised under its stress tests and big forward-looking capital reviews. (Ergo: “…designing an internal capital planning process that simply seeks to mirror the Federal Reserve’s stress testing is a weak practice“.)

It doesn’t name names. More’s the pity. Read more

Stress you next year

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

JPM: stress is what other banks feel

A grateful hat tip to the FT’s Shahien Nasiripour for constructing and sending us the following basic spreadsheet.

It shows the discrepancy between the Fed’s estimates of how the largest banks would perform in its latest stress test scenario, versus how the banks themselves said they would fare (click to enlarge): Read more

Moody’s on Spanish banks and others on the bailout muddle

The Oliver Wyman report landed last week. The headline was that Spain’s banks would need almost €60bn in new capital and that seven out of the 14 Spanish banks under review failed the ‘bottom up’ test.

The actual recap figure was €59.3bn, falling to €53.7bn because banks are allowed to count in both mergers in which they’re involved and deferred tax assets. We expressed some scepticism about those DTA’s and the rather hopeful proposition that… Read more

Those Spanish stress test results

Seven (many already nationalised) lenders, comprising 37 per cent of Spanish banks’ loan portfolios, failed and need more capital. Seven lenders passed.

It’s almost €60bn, as initial estimates had suggested in June. Read more

The €52bn (or maybe €62bn) Spanish bank clean-up

That’s €51.8bn (how precise) from Roland Berger… and €62bn from Oliver Wyman…

Update — Here are the reports in full (click images for docs): Read more

Citi didn’t fail – it just overreached, a little bit

Yes, we said they failed the Fed stress tests. But maybe it’s not quite so dire as it sounds.

First, remember that Citi’s tier one capital ratios only fell short by 0.1 per cent — they came in at 4.9 per cent rather than the 5 per cent minimum. Read more

BofA’s stress scenarios

Bank of America told regulators last year that it would sell its Texas retail unit and offload its US Trust wealth management arm if forced to raise capital in a stressed market, says the WSJ. The Fed required BofA to submit the capital-raising plans last year, and the list will form part of this year’s US bank stress tests. BofA said it could issue common stock before selling these businesses. An exit from Texas would mark a milestone for BofA: it acquired its footprint there in 1989 during the Savings & Loan crisis, as its first major national acquisition.

European banks offer new capital proposals

European banks are proposing capital-raising measures that go beyond regulators’ demands and would cut only a small amount of lending to the real economy, according to a preliminary assessment of the plans by the European Banking Authority, reports the FT. In December the EBA identified a capital shortfall of €115bn at 30 banksand told the institutions to come up with plans to raise their core tier one capital ratios to 9 per cent of their risk-weighted assets by July.


European banks ‘need tons of money’, says GMO

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

Where not to buy your sovereign CDS

As part of their recommendations for the recapitalisation of banks, the European Banking Authority released some shiny new data around credit derivatives that are linked to European sovereigns on Thursday.

DTCC data on credit default swaps are released on a weekly basis. However, these data are aggregated such that it’s impossible to know anything about individual banks’ exposures. The banks disclose some information themselves, but it’s often netted and marked in a way that makes it pretty challenging to compare, contrast, and interpret meaningfully. Read more

Want to boost tier one capital? Make losses and prosper

The EBA results came out on Thursday and for all of the discussion around what constitutes high quality core tier one capital, there was faint mention of the massive countercyclical component contained therein.

An example of a countercyclical accounting buffer would be DVAs — the gains that banks can book as a result of a deterioration of their own credit worthiness. When they are doing badly, they get a boost to their earnings. When things start to get better, they have to take corresponding losses as the earlier gains are reversed. Read more

Is there a world outside EBA capital targets? [updated]

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

Meet the new Fed stress tests…

… same as the old Fed stress tests.

At least that’s the prediction of Nomura’s Glenn Schorr, whose note published on Thursday plays down any expectations that the forthcoming Comprehensive Capital Analysis and Review (CCAR, or “stress test”) will lead to increases in share buybacks or dividends. Read more

EBA: €106bn of bank capital needed — we think

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

Welcome to the European bank recap jungle

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

Building a better bank recap, discount curve edition

At some point on Wednesday, eurozone governments will say they want banks to find an unspecified amount capital, based on revised sovereign haircuts which… we still don’t know a lot about.

We know that sovereign bond positions will be marked down, or up, according to market values. (When the values will be taken, we don’t know either. Imagine marking five-year Italian debt at dates before and after this summer’s ECB intervention, for example.) We know at the very least that this all fits into a 9 per cent core tier one capital ratio target. Read more

Gilt-stuffed and shrinking: euro banks’ capital hole

It’s afternoon in New York, which means at least one of the following is about to happen:

1. The abrupt appearance of odd confectionery in the FT bureau. Read more

The not so great European banking recap

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

European banks look to shed assets rather than raise equity

Momentum is gathering behind the view that banks plan to shrink their way out of trouble – reducing risk-weighted assets, the denominator of capital ratios, rather than increasing equity, the numerator, explains the FT. This is in response to the EBA turning the stress tests up to nine (or maybe 10), according to FT Alphaville. German banks, however, protest that any risk assessment of European banks should be based on the current concept of capital requirements, and should not anticipate the Basel-III rules that are only supposed to come into effect from 2019, reports the FT. However, even if banks do seek to raise additional capital in private markets, they may find themselves facing an investor boycott, according to Bloomberg.

Taking the stress test to nine (ex-bad stuff)

Just like the good old days. A Pestowire ‘exclusive’ on banking recapitalisations.

From the BBCRead more