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
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
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
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
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
…. 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 here. Read more
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
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
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
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
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
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
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
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.
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
… 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
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
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
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
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.
Just like the good old days. A Pestowire ‘exclusive’ on banking recapitalisations.
From the BBC: Read more