This is probably the most prescient observation about the stress tests. They may have been a bit of a ‘whitewash’, there may be a boost in confidence in european banks on the world markets and everybody involved may give themselves a pat on the back for a job well done.
However, like all endevours, there is a flip side. The flip side to the stress tests is that a line has been drawn under bank capitalisation of the relevent banks. They have been given the all clear with respect to their Tier1 capital ratios. This puts them in the position that they will find it difficult to go to the market to raise capital unless they have specific expansion plans. Any bank that has passed the stress tests, going to the market for ‘survival’ capitalisation will undermine the credibility of the whole process. Any bank requiring further government funding will undermine the whole process.
One wonders if a consequence of this is that the banks will have to support each other. If one goes belly up, it undermines the credibility of all the others, therefore if one gets into trouble, the others will have to shore it up behind the scenes to keep the whole mirage intact.
From a particularly Irish perspective, the stress tests have put paid to the lie that Anglo and the other banks aside from BOI and AIB are of systemic importance. There is an unspoken indication by the central bank, from the non inclusion of all other Irish banks, that (i) they would probably fail the stress tests and/or (ii) they are not of systemic importance and therefore could be allowed to go to the wall.
The other thing is that BOI and AIB will find it increasingly difficult to raise interest rates (without an increase in central bank base rates), without appearing to be greedy bastards who took the publics money and now want to screw them with increased interest rates. We know that they need these rate increases to survive, but nobody can admit this. Calls for a reversal of recent decisions on interest rate rises have started.
I agree Fooled by Randomness and Enoch, by having a bogus pass/fail line, if one of the passed banks gets into trouble (which is quite likely even in a normal recession never mind a financial crisis), they are all tarred again with the same brush.
I see the specifics of how much they passed by have been released - has this been done for all the banks in the test? Is it online anywhere?
Ta Enoch. I see a comment by an unnamed German banker that anyone close to the 6% will be considered by the market as a de-facto fail - that rather raises the pass/fail bar.
I see that the 91 banks represent 65% of the banking system in the eu banking sector with at least 50% coverage in each country. This leaves a sizeable level of ‘bad’ stuff to happen. As I recall, the much maligned US stress tests covered 80some% of the US banking system by assets: online.wsj.com/article/SB124172137962697121.html
In particular, the most toxic banks in Europe (possible after HRE!) weren’t included. The reason this is significant, IMO, is that a european state still needs to support the smaller badder banks - Anglo is a weeping sore, but INBS is gangrenous. This has large implications for the stability of sovereign debt in the country as well as counterparty liabilities. The hobson’s choice facing states is going to be letting themselves go bust or letting a bank go bust that might result in other banks toppling. I don’t see any evidence that localised systemic risks have been examined, never mind accounted for.
We have not nationalised the banks. By letting AIB have until the end of year to fix capital we have a zombie bank until then although right decision to wait to sell its overseas business. In meantime government should have put in temporary capital to be repaid from overseas sales this would move AIB along the road back to proper functioning bank. BOI is much further down the track to normality.
At operational level both banks are pushing up and will continue to push up margins and pushing down costs and there is a lot more profitable business out there that they will pick up in future as foreign banks shrivel their size here. Remember they are now a monopoly on lots of banking business in the state and it will stay that way for a long time - alot longer than normal markets ie we won’t have a bank of scotland rushing in here in a few years with stupid margins - thats a decade away now.
It will benefit no one for them to take a theoretical massive haircut on irish debt in a stress test.
Remember bond markets only two years ago thought greek debt was similar to german debt. Now to be saying a mere two years later that all sovereign debt should have a large haircut for bank tests is nonsense. Most of the sovereign govts will get through, they can easily cut back on the expensive welfare systems most have in place and savings in lots of these countries is high. Markets have always jumped too high and fallen too far. As Mr Buffett says be fearful when others are greedy and greedy when others are fearful. Where will BOI particularly and AIB be in 5 years time.
A thought that has been puzzling me for some time and is salient to the recent ‘success’ of BOI and AIB in the recent stress tests.
Did / do these banks have CDS in place to cover their loans to developers? if they did, then their losses may not have been as great as we may have been lead to believe. In fact they may have even made some money by claiming and subsequently selling defaulted loans to NAMA. Anybody got any information please?
The “Pass” Results for AIB and BoI in the EU Capital Stress Tests are very misleading…bordering absurd!
Consider…If the AIB and BoI are indeed so well capitalised, then it should be very easy, at this stage, for the Government to remove the State Guarantee on Customer Deposits.
I think you’ll agree that, if the Government at this point even reduced the Guarantee on Deposits to a Deposit ceiling of €100K , there’d be an instant huge rush to get Deposits out of the banks!
So much for the Banks being well capitalised!
Stress Test Eurocrats… GET REAL!!!
In the case of AIB, the EU’s Capital Stress test assumed AIB raising the €7.4bn required re-cap by this year-end. This is more smoke and mirrors!
But what’s new?! The Government has a proven 100% preference for mis-information and untruths!
The Eurocrats might have considered giving both Banks the following new Grade… fianna “FAIL” !!
**By the way AIB’s correct immediate min re-cap requirements are €10bn (not €7.4bn) and BoI’s correct immediate min re-cap requirements are €6.5bn **(not the €3.65bn stated by the Minister and the Central Bank and Head of Regulation in March 2010, based on Loans assets information supplied by the Bank at the end of 2009 and very early in 2010 which we now know was unreliably optimistic).
here’s an unpleasant thought: in light of AIB’s capital requirement being upped from 7.4bn to 10.4bn, a mere two months after the stress tests, are Elderfield and Honohan’s reputations not severely dented?
40% wrong! That’s a sacking offence in many quarters.
FFers love to hide behind these ‘internally respected experts’. Well, they deserve a lot less respect after yesterday.
Clearly it was not a very stiff test, even the bust Iceland banks would have passed.
This is not over, it’s just waiting.
Ireland has to get out of the Euro, and repeal the guarantee.
January is the next hurdle. Watch the exchequer returns for October.