European banks set for ‘Chaos Monday’ after 9 fail
Jul 16, 2011 17:05:04 GMT -5
Post by PrisonerOfHope on Jul 16, 2011 17:05:04 GMT -5
European stress tests: banks set for 'chaos Monday' after nine fail
European banks are set for a day of “chaos” on Monday as investors and analysts derided the latest round of industry stress tests as “inadequate”.
Between five and 15 smaller lenders had been expected to fail the test
By Harry Wilson, and Philip Aldrick
10:44AM BST 16 Jul 2011
The nine banks that failed the European Banking Authority’s (EBA) stress tests will have to raise just €2.5bn (£2.2bn) between them to meet their capital shortfall.
City analysts and investors said the criteria used by the EBA were overly optimistic and failed to capture the severity of the current sovereign debt crisis sweeping across the eurozone.
“If the European Union could monetise the value of the credibility it has destroyed it would be the richest organisation on earth,” said one major credit manager.
The detail provided by the banks is far greater than in last year’s stress tests and the fear now is that with so much information fund managers and bank analysts will be able to make their own judgments on how much extra capital will be required by the 90 banks covered by the tests.
“I think next week could see chaos. It’s clear the tests the EBA has done are inadequate. We now have the weekend to work out what the banks really need,” said one analyst at a major European bank.
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Using tougher criteria, Credit Suisse analysts said at least 14 banks should have failed the test.
Credit Suisse estimated that these banks, which would include all seven Greek banks participating in the process, need to raise about €45bn in new capital.
Andrea Enria, chairman of the EBA, insisted yesterday the tests the organisation had performed were rigorous, though he admitted market conditions had worsened since the criteria were set. “European banks are clearly in a better position to absorb shocks,” he said.
In addition to the nine that failed, another 16 banks need to strengthen their balance sheets to rebuild confidence in the embattled sector.
Britain’s lenders received a clean bill of health, but five banks in Spain, two in Greece and one in Austria failed the tests. Another German bank would have failed but dropped out of the tests due to a dispute over its capital. A further seven Spanish, two Greek, two Portuguese and two German lenders were among the 16 identified as perilously close to danger.
The tests were conducted on banks in 21 countries to assess their ability to withstand a prolonged recession without suffering such deep losses that their core capital ratios – their reserves against losses – dropped below 5pc.
They were designed to calm nervous investors and restore investor confidence. The EBA has faced criticism for being too soft, particularly because it did not make any allowance for a sovereign debt default – as is now widely expected in Greece. While Greek bonds are trading at about half their face value in the market, the EBA only required banks to assume a 15pc loss on their holdings.
The EBA argued its tests were “rigorous”, saying the banks would need to provision €200bn (£175bn) in each of 2011 and 2012 – the two-year timeframe under review. The level of provisioning was “equivalent to the loss rates of 2009 repeated in two consecutive years”, it said.
However, the EBA said it allowed a large degree of discretion for recapitalisation plans. Although the test was applied to 2010 results, any capital raised between January and April this year was admissible, bolstering balance sheets by £50bn.
A further £28bn of “existing and future actions” also helped increase overall capital levels.
The EBA said that without this £50bn, 20 banks would have failed the stress tests.
The accusations follow last year’s widely-derided tests by the Committee of European Banking Supervisors. Seven banks failed the last set, but all the Irish banks passed. A few months later, Ireland had to nationalise its banking industry as its lenders faced insolvency.
Spain has already begun taking steps to bolster the five regional savings banks that failed by injecting taxpayer funds, but the EBA has instructed those banks that nearly failed to take remedial action.
Those banks, thought to be the 16 with less than 6pc capital under the stress scenario, have three months to detail how they will bolster their balance sheets and until April to “fully implement” the plans.
www.telegraph.co.uk/finance/newsbysector/banksandfinance/8641514/European-stress-tests-banks-set-for-chaos-Monday-after-nine-fail.html
European banks are set for a day of “chaos” on Monday as investors and analysts derided the latest round of industry stress tests as “inadequate”.
Between five and 15 smaller lenders had been expected to fail the test
By Harry Wilson, and Philip Aldrick
10:44AM BST 16 Jul 2011
The nine banks that failed the European Banking Authority’s (EBA) stress tests will have to raise just €2.5bn (£2.2bn) between them to meet their capital shortfall.
City analysts and investors said the criteria used by the EBA were overly optimistic and failed to capture the severity of the current sovereign debt crisis sweeping across the eurozone.
“If the European Union could monetise the value of the credibility it has destroyed it would be the richest organisation on earth,” said one major credit manager.
The detail provided by the banks is far greater than in last year’s stress tests and the fear now is that with so much information fund managers and bank analysts will be able to make their own judgments on how much extra capital will be required by the 90 banks covered by the tests.
“I think next week could see chaos. It’s clear the tests the EBA has done are inadequate. We now have the weekend to work out what the banks really need,” said one analyst at a major European bank.
Related Articles
Euro debt crisis germs will spread unless politicians act
16 Jul 2011
Stress tests: analyst reaction
15 Jul 2011
European bank stress tests: Q&A
15 Jul 2011
Kicking the tyres of Europe's banks
15 Jul 2011
Using tougher criteria, Credit Suisse analysts said at least 14 banks should have failed the test.
Credit Suisse estimated that these banks, which would include all seven Greek banks participating in the process, need to raise about €45bn in new capital.
Andrea Enria, chairman of the EBA, insisted yesterday the tests the organisation had performed were rigorous, though he admitted market conditions had worsened since the criteria were set. “European banks are clearly in a better position to absorb shocks,” he said.
In addition to the nine that failed, another 16 banks need to strengthen their balance sheets to rebuild confidence in the embattled sector.
Britain’s lenders received a clean bill of health, but five banks in Spain, two in Greece and one in Austria failed the tests. Another German bank would have failed but dropped out of the tests due to a dispute over its capital. A further seven Spanish, two Greek, two Portuguese and two German lenders were among the 16 identified as perilously close to danger.
The tests were conducted on banks in 21 countries to assess their ability to withstand a prolonged recession without suffering such deep losses that their core capital ratios – their reserves against losses – dropped below 5pc.
They were designed to calm nervous investors and restore investor confidence. The EBA has faced criticism for being too soft, particularly because it did not make any allowance for a sovereign debt default – as is now widely expected in Greece. While Greek bonds are trading at about half their face value in the market, the EBA only required banks to assume a 15pc loss on their holdings.
The EBA argued its tests were “rigorous”, saying the banks would need to provision €200bn (£175bn) in each of 2011 and 2012 – the two-year timeframe under review. The level of provisioning was “equivalent to the loss rates of 2009 repeated in two consecutive years”, it said.
However, the EBA said it allowed a large degree of discretion for recapitalisation plans. Although the test was applied to 2010 results, any capital raised between January and April this year was admissible, bolstering balance sheets by £50bn.
A further £28bn of “existing and future actions” also helped increase overall capital levels.
The EBA said that without this £50bn, 20 banks would have failed the stress tests.
The accusations follow last year’s widely-derided tests by the Committee of European Banking Supervisors. Seven banks failed the last set, but all the Irish banks passed. A few months later, Ireland had to nationalise its banking industry as its lenders faced insolvency.
Spain has already begun taking steps to bolster the five regional savings banks that failed by injecting taxpayer funds, but the EBA has instructed those banks that nearly failed to take remedial action.
Those banks, thought to be the 16 with less than 6pc capital under the stress scenario, have three months to detail how they will bolster their balance sheets and until April to “fully implement” the plans.
www.telegraph.co.uk/finance/newsbysector/banksandfinance/8641514/European-stress-tests-banks-set-for-chaos-Monday-after-nine-fail.html
