Tagged: Trading losses

EU Bank Stress Tests Fail to Reassure Investors Wary of Capital Criteria

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.   

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Euro Falls as Stress Test Said to Only Consider Trading Losses

Bloomberg | Jul 23, 2010

Euro notes 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.

Stress Tests

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.  

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