Reuters | Sun Jul 25, 2010 | 8:12pm IST
EU tests of banks’ ability to withstand financial shocks, criticised as too easy after only 7 out of 91 failed, face their own stress test in the markets on Monday with early signs pointing to a more positive response. European Union policymakers and regulators voiced relief at Friday’s results but some market analysts and many media commentators derided an exercise in which all listed banks passed as lacking in credibility. "I see nothing stressful about this test. It’s like sending the banks away for a weekend of R&R," said Stephen Pope, chief global equity strategist at brokers Cantor Fitzgerald. There was scepticism about EU regulators’ conclusion that banks need only a total of 3.5 billion euros ($4.5 billion) in extra capital. Market expectations had ranged from 30 to 100 billion euros, although many European banks have already raised capital during the financial crisis.
Only five small Spanish banks, Germany’s state-rescued Hypo Real Estate and Greece’s Atebank failed outright. More than a dozen others scraped through with just over the required 6 percent of Tier 1 capital in the most stressful scenario and are likely to come under market scrutiny. However, the wealth of data disclosed by banks representing 65 percent of assets, and the commitment of banks, regulators and governments to follow-up action may well outweigh doubts about the stringency of the tests. In a first market reaction in New York late on Friday, the cost of insuring the debt of large European banks fell further and the euro rose against the dollar despite worries about the tests’ credibility. Better-than-expected economic data and business confidence surveys suggesting the euro zone will avoid a double-dip recession despite fiscal austerity measures are also helping revive investor confidence in Europe.
Given the haggling among EU governments and regulators about the stress tests right up to the last moment, the degree of transparency was greater than had been expected a few weeks ago. Sources familiar with the discussions said Germany fought hard behind closed doors to limit the extent of disclosure. In the end, most banks — except Deutsche — issued a detailed breakdown of their exposure to the sovereign debt of EU countries, enabling investors to run their own risk simulations to gauge counterparty’s solidity. "We have all the sovereign exposure data, and we can go ahead and do our own tests," said Nial O’Connor, a banking analyst at Credit Suisse. That should help reopen the interbank lending market, which partially froze at the height of the euro zone debt crisis in May and has remained tight due to fears that banks have been hiding big exposures.
It also responds to one of the major criticisms of the exercise — that the scenario assumed a "haircut" on sovereign debt of countries such as Greece held in banks’ trading books, but not on a longer-term basis in their banking books. The EU authorities were chastised for refusing to test the impact of a default by Greece. But European Central Bank governing council member Christian Noyer said euro zone states "have put several hundreds of billions of euros on the table with the support of the IMF to make this hypothesis completely excluded".
Spain, which spearheaded the drive for transparency, tested a larger part of its banking system and disclosed more data than any other country, hoping to clear away lingering market suspicion of its smaller banks’ solvency. However economist Nicolas Veron of the Bruegel think-tank said Madrid had underplayed the recapitalisation needs of the cajas, regional savings banks, although its bank resolution fund (FROBE) is well on the way to meeting those needs. "The Spanish wanted to be seen as the most transparent and deserve praise for the catalyst role they played, but in the end they clearly understated what the cajas need," he said in a telephone interview. Veron said follow-up actions by governments and regulators should include pressing weaker banks to recapitalise, if necessary with state help and facilitating cross-border takeovers of weaker banks.
Even before the results were published, National Bank of Greece, Slovenia’s NLB and Civica in Spain announced plans to raise capital. Italy said it would reopen an offer of government-backed bonds to support its banks, although none failed. Monte dei Paschi di Siena squeaked through with 6.2 percent of Tier 1 capital under the most stressful scenario, and UBI Banca with 6.8 percent. Veron said the success of the exercise would depend partly on whether European regulators adopt a more cooperative approach after the stress tests than they did before them. "If this is the start of a beautiful friendship among EU supervisors, then that’s not the same as if the united front crumbles next week and they start criticising each other again," he said.
Reuters | Sat Jul 24, 2010 | 11:29am IST
Investors are finding themselves with a new kind of balancing act — one in which they have to juggle with three major regions posing three significantly different circumstances. Europe’s bank stress testing, the focus of much of the past week’s market focus, is but one ball in the air. First there is the United States, which is believed to be facing another slowdown, if not a double-dip recession. Then there is Europe, suffering a debt crisis and austerity-bound, yet suddenly surprising everyone with an unexpected burst of economic vigour. Thirdly, comes Asia growing away so merrily that investors are beginning to be concerned that too much zeal will be exercised in trying to slow things down. On top of that there is the decoupling of economics and earnings — keeping bond yields down and lifting stocks. The latest investment flow data from EPFR Global showed "yield hungry but skittish" investors flooding into bonds, but world stocks are up more than 7 percent for the month. "We are really in a much more difficult stage of the recovery right now," Michala Marcussen, head of global economics at Societe Generale, said at a briefing with Reuters journalists. She described markets as struggling with a "rotating crisis" in which one problem in one region becomes the focus of concern, only to be quickly replaced by another in another region. "That ping pong is likely to go on for some time," she said.
Entering the new week, investors will first have to deal with any fallout from the stress tests of 91 European banks, due out of Friday after much fanfare. Markets have been fairly calm about the tests, which, with Greece and other peripheral euro zone economies in mind, were designed to see how banks would fare in serious future crises. The consensus has been that some smaller banks may fail but that the amounts needed to recapitalise them against future crises would be manageable or indeed in many cases have already been put on one side by governments. Franz Wenzel, strategist at AXA Investment Managers in Paris, sees no broad impact for equities from the results, even if a number of small banks need to have capital hikes. "Recapitalisation will affect the usual suspects: small regional banks. But all this will be done in a smooth and harmonised way with local authorities, and it shouldn’t be a market-disruption event," he said.
Reuters | Sat Jul 24, 2010 | 11:31am IST
Valuations on Europe’s banking sector may look cheap on paper but don’t expect U.S.-based portfolio managers to scoop them up even after stress tests showed a vast majority have sufficient capital. The results of Friday’s assessment, criticized for not being tough enough, found that just seven out of 91 European banks would need to bolster their balance sheets by a total of 3.5 billion euros ($4.5 billion) to withstand another recession. "To us the bank stress test results came out as a non-event. When you look at the results they didn’t look very stressful," said Scott Snyder, portfolio manager of the ICON Advisers Europe fund. The method of the stress test has drawn scrutiny particularly because of the way the tests treated European government debt. Even so, U.S. investors had already shown distaste for the European banking sector as data reveal the massive net selling that has occurred over the last two years.
U.S. mutual funds cut their holdings of publicly traded European banks identified in the tests to just $12.1 billion from $29.8 billion, a whopping 59.2 percent decline in the last two years through May, according to Lipper, a Thomson Reuters company. The bulk of the sell-off was between 2008 and 2009. However even after the U.S. government conducted its own stress tests in May of last year — widely believed to have put a floor underneath U.S. financial shares — holdings in Europe’s banks continued to decline. "It stands to reason the most visible banks in Europe are the most scorned, perhaps because we know more about them. The holdings of ING, Bank of Ireland, Commerzbank, and Royal Bank of Scotland used to account for $4.4 billion in account assets. Now they are less than $800 million," said Jeff Tjornehoj, U.S. and Canada research manager at Lipper. By comparison, U.S. bank shares, as measured by Standard & Poor’s financial index, have risen 13.57 percent since the U.S. government announced its stress test results on May 7, 2009, through Thursday.
Bloomberg | Jul 23, 2010
European regulators found that seven banks need to raise a combined 3.5 billion euros ($4.5 billion) of capital, underwhelming analysts who said the stress tests may not have been strict enough. “The amount of capital needed is much lower than the market expected,” said Mike Lenhoff, chief strategist at London-based Brewin Dolphin Securities Ltd., which oversees $33 billion. “It seems quite trivial considering the concerns about losses from the sovereign crisis.” Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks didn’t have adequate reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said yesterday. The banks that failed the stress tests are in “close contact” with national authorities over how they will raise capital, said the Committee of European Banking Supervisors, which ran the assessments of 91 lenders. European governments are using their first coordinated stress tests to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal. Rising budget deficits in those countries raised concern that they won’t be able to pay their debts. “This is not reassuring at all,” said Komal Sri-Kumar, who helps manage $118 billion as chief global strategist at TCW Group Inc. in Los Angeles. “These tests were set in such a way that most of them would pass. That doesn’t say to me that the banking system is stable.”
‘Not Very Rigorous’
Before the results were published yesterday, analysts at Goldman Sachs Group Inc. estimated that lenders would need to raise 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the U.S. last year found that 10 lenders, including Bank of America Corp. and Citigroup Inc., needed $74.6 billion. “I don’t think the market is so stupid as to think that they were so wrong,” said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees about $57 billion. “The right explanation here is that the testing was not very rigorous.” European banks have already raised 220 billion euros in the past 18 months, Credit Suisse Group AG analysts said in a report this week. With that amount already raised, it was likely that most European banks would pass the tests, the analysts said.
Bloomberg | Jul 23, 2010
Seven European Union banks failed the region’s stress tests with a combined capital shortfall of 3.5 billion euros ($4.5 billion), according to the Committee of European Banking Supervisors, which coordinated the initiative. “National authorities are in close contact with these banks to assess the results of the test and their implications, in particular in terms of need for recapitalization,” the committee said in a statement on its website today. EU regulators scrutinized 91 of the bloc’s banks to assess whether they have enough capital to withstand a recession and sovereign-debt crisis, with a Tier 1 capital ratio of 6 percent as a floor. Governments are seeking to reassure investors about the health of financial institutions after the debt crisis pummeled the bonds of Greece, Spain and Portugal.
“If no one fails, everyone would question the legitimacy,” said Florian Esterer, who helps manage about 60 billion Swiss francs at Zurich-based Swisscanto Asset Management. “I’m pessimistic about the results boosting confidence in the markets,” he said before publication of the tests. The evaluations took into account potential losses only on government bonds the banks trade, rather than those they are holding to maturity, according to CEBS. That means the tests are set to ignore the majority of banks’ holdings of sovereign debt, investors said. “The tests need to be across the board,” said Andrea Williams, who manages about 1.1 billion pounds ($1.69 billion), including ‘BNP Paribas SA and Credit Suisse Group AG shares’, at Royal London Asset Management in London. “It does undermine the whole credibility of the tests.”
Bloomberg | Jul 23, 2010
The euro slumped against the dollar after a draft document said the 91 banks being stress-tested were only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity. “If that’s the case, that would be a huge disappointment,” said Kathy Lien, director of currency research, with online-currency trader GFT Forex in New York. “In order to restore investor confidence it needed to look at the entire balance sheets of these banks.” The yen fell versus the dollar as Japanese policy makers for a third straight day signaled that a stronger currency poses a danger to growth, spurring speculation they will take steps to counter that risk. The euro rose earlier as Germany’s IFO institute said its business climate index jumped to 106.2, the highest level since July 2007. Hungary’s forint snapped a three- day gain as Moody’s Investors Service said it may reduce the nation’s credit rating. The 16-nation European currency fell 0.4 percent to $1.2837 at 9:47 a.m. in New York, from $1.2893 yesterday. The yen weakened 0.5 percent 87.35 per dollar from 86.95 yesterday. “It’s mostly a funding switch and people betting on the funding switch and being disappointed right now,” said Sebastien Galy, a currency strategist at BNP Paribas SA in New York.
Regulators are scrutinizing European banks to assess if they have enough capital, defined as a Tier 1 capital ratio of at least 6 percent, to withstand a recession and sovereign debt crisis, according to a document from the Committee of European Banking Supervisors. Lenders that fail the trials will be made to raise additional capital. The results will be published by CEBS and national regulators starting at 6 p.m. Brussels time. “The haircuts are applied to the trading book portfolios only, as no default assumption was considered,” according to a confidential document dated July 22 and titled “EU Stress Test Exercise: Key Messages on Methodological Issues.” The tests will assume a loss of 23.1 percent on Greek debt, 14 percent of Portuguese bonds, 12.3 percent on Spanish debt, and 4.7 percent on German state debt, according to the document obtained by Bloomberg News. U.K. government bonds will be subject to a 10 percent haircut, and France 5.9 percent.
Bloomberg | Jul 23, 2010
The success of the European Union’s bank stress tests hinges on how much detail regulators provide about the basis for their conclusions, not on the number of lenders that fail, investors said. “The more transparency, the more important that the results will be,” said Peter Braendle, who helps manage $51 billion at Swisscanto Asset Management in Zurich. “If the methodology is a black box and we just get some results that will not be very helpful.” Regulators are scrutinizing banks to assess if they have enough capital, defined as a Tier 1 capital ratio of at least 6 percent, to withstand a recession and sovereign debt crisis, according to a document from the Committee of European Banking Supervisors. Lenders that fail the trials will be made to raise additional capital. The results will be published by CEBS and national regulators starting at 6 p.m. Brussels time today.
The assessors haven’t so far provided full details of their criteria raising concern among investors they will not be stringent enough. U.S. regulators published the metrics they used to test their banks before they released their results last year. U.S. bank stocks rallied 36 percent in the seven months following the trials. Governments are publishing the results of the region’s first coordinated stress tests as they seek to end concerns about the health of the banking system almost three years after the subprime crisis roiled global financial markets. The 54- member Bloomberg Europe Banks and Financial Services Index has risen 9.3 percent this month, boosted by optimism that lenders will pass. By comparison, the U.S. Standard & Poor’s Financials Index has gained about 4.7 percent.
‘Create Your Own’
“It’s pretty clear that a lot of banks will pass this test,” said Lutz Roehmeyer, who helps manage about $15 billion at Landesbank Berlin Investment, including bank shares. “It will be more important to see what raw data will be published. With that you can create your own, more stringent scenarios.” Ten of the 91 banks being tested are likely to fail, Goldman Sachs Group Inc. analysts said in a note to clients today, citing their own survey. Analysts’ estimates for the amount of capital European banks will need to raise range from 30 billion euros ($38.7 billion), according to Nomura Holdings Inc., to as much as 85 billion euros at Barclays Capital. Investors have criticized the tests, saying they may not be rigorous enough. In particular, they are questioning to what extent regulators are examining banks’ sovereign-debt holdings, including how government bonds in the trading and banking books will be valued in the event of a sovereign debt crisis.