7 EU banks fail worst case stress test scenario

[BoyRacer]

7 EU banks fail worst case stress test scenario -> finance.yahoo.com/news/Vast-majo … 7.html?x=0

LONDON (AP) – All but 7 of 91 European banks passed the much-anticipated “stress tests” aimed at showing Europe’s banking system is sound enough to weather the continent’s debt crisis – an outcome that officials hoped would forestall further market turmoil.

This worst-case scenario dubbed “sovereign shock” still stopped short of an outright debt default by an EU government and has made the tests less convincing to some, since many analysts still predict Greece will eventually have to restructure its debt – a polite word for default, under which creditors are paid over a longer period of time.
The bank examiners said government default was precluded by an EU rescue fund to backstop countries in financial difficulty.

Germany’s already-nationalized lender Hypo Real Estate Holding AG failed the strength test, but that had been widely expected. So far, the bank, which does not expect to return to profit before 2012, has received capital injections worth euro7.7 billion ($10 billion) from the German government’s bank rescue fund and loan guarantees of more than euro100 billion.

There had been speculation in the run-up to the publication of the results that some of Germany’s regional banks – the landesbanken – would fail to clear any stringent hurdles.

As it was, only NordLB came close to joining Hypo but barely scraped by.

As expected, Spain notched up the most casualties, with five of its small savings banks – the so-called cajas – deemed as having insufficient capital to deal with future adverse shocks following the collapse of the country’s property boom. The five Spanish banks – none of them listed on stock markets – were Diada, Unnim, Espiga, Banca Civica, and Cajasur, which was bailed out by the Bank of Spain in May.

Greece’s ATE bank failed and confirmed it would go ahead and proceed with a capital increase, which will involve the highly indebted Greek government itself, the main shareholder.

In total the seven banks have to raise euro3.5 billion to shore up their finances, CEBS said.

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[BoyRacer]

EU stress tests seen as too soft -> video.ft.com/v/221188580001/EU-s … -too-soft-

[BottomsUp]

It’s just a marketing exercise to instill confidence, nothing more.

[BoyRacer]

Bank stress tests ‘too little, too late’ says City -> telegraph.co.uk/finance/news … -City.html

US law firm Allen & Overy described the test as a “failure” and said banks that had only just passed would now be under pressure from the market to improve their capital ratios.

“There is little evidence that the tests have been applied consistently and there is a lack of credibility, making this a wasted opportunity,” said Richard Cranfield, chairman of Allen & Overy’s global corporate group. “One assumes those banks that have failed will be rescued or recapitalised.”

The results provoked a short-lived rally in the euro against the dollar. However, the single currency fell back as criticism of the tests grew with the publication of further details on the methodology.

Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland were as expected given a clean bill of health. The weakest performer was Lloyds, which passed the most difficult test with a capital ratio cashion of three percentage points, while the strongest was Barclays.

Some investors were prepared to give the tests their support and said it could act as the prompt for the European authorities to provide more support to the region’s banking sector.

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[BoyRacer]

Why the European Stress Test is Meaningless -> israelfinancialexpert.blogspot.c … gless.html

The Main Flaws of the Test

1. Under the most severe scenario, banks were tested on how they would cope with a moderate recession,
   not a severe depression. Notice the fact that in Greece, Spain and Ireland we already defiantly in
   Depression conditions (Deflation, Unemployment north of 15%, Contracting credit, etc.)

2. Some of the banks dodged full disclosure full disclosure of their foreign debt holdings.

3. The test demanded a Tier 1 capital ratio of 6 percent or above by the end of 2011, an extremely low and
   inefficient amount.

4. Government bond losses were only applied to trading books, and not hold-to-maturity bonds, as the test
   did not consider there was a risk of any sovereign default.

The true exposure of European banks

Please notice that banks in Germany and France alone have a combined exposure of $119 billion to Greece and $909 billion to Portugal, Ireland, Greece, and Spain. And overall, European banks have $253 billion in Greece and $2.1 trillion in the so-called PIGS. (This data excludes Italy which has a gross external debt of 2.3 trillion dollars, mainly to European banks.)

**When a country goes bankrupt so do the banks!**

This simple face appears to have missed the eyes the European bureaucrats. The only thing backing the world’s banking system and preventing it from collapsing immediately is an implicit/explicit government guarantee that it will bail the banks out if necessary. In a debt deflation scenario such as southern Europe is facing the loans on banks’ balance sheets will fall in value since the underlining assets backing the loans will in price(mainly houses) and the ability of the debtors to repay will diminish. The market has already shown that demands from these countries to cut their spending, not raise it and bailout of those banks will be extremely expensive. Germany alone, with its 3.3 trillion dollar economy simply can’t back all these countries. In fact, it is questionable if it can back its own banks after all the potential losses materialize.

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