Europe’S ‘Toothless’ Bank Tests Making Matters Worse

[interestrateripoff]

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/7873792/Europes-toothless-bank-tests-making-matters-worse.html

RBS and other City institutions have warned that Europe’s stress tests for banks are almost useless and may further damage confidence if they fail to cover the risk of large losses on sovereign defaults by Greece and other Club Med states.

“I don’t think it is going to work,” said Jacques Cailloux, Europe economist at RBS. “These stress tests are not rigorous enough. Investors are already pricing in a 50pc “haircut” on some Greek bonds so this has to be included, and perhaps 30pc for Spain.”

“We have had a complete failure of communication by the eurozone over recent months with 16 countries all saying different things, and there is a very high chance of another failure this time.”

Mr Cailloux, who has issued a “double dip alert” for Europe, said it would be unwise for EU policy-makers to go holiday this summer. Markets are no longer willing to take on exposure to some €2 trillion of household and company debt in Spain, and this gap cannot be plugged for much longer by three-month loans from the European Central Bank.

“If by the end of the summer we have not had much more aggressive policy action, we’re back to contagion. This time it is no longer just a peripheral story. It is starting to infect the core eurozone as well, France in particular. I cannot understand why the ECB is not buying Spanish corporate bonds,” he said.

Christine Lagarde, French finance minister, said the result of tests would be published on July 23. Details will emerge over coming days on “the exact criteria we apply and of how heavily we stress the system”.

The tests will cover up to 100 banks, including many of the Spanish cajas and German savings banks at the eye of the storm. A report by CreditSights said some cajas have disguised the true scale of losses from the housing bust by propping up mortgage securities through purchases of delinquent loans from mortgage pools. The share prices of Allied Irish, Bank of Ireland, Dexia, and Credit Agricole have all fallen hard recently.

Mrs Lagarde said the tests will show that Europe’s banks are “solid and healthy”, but it is this tone of certainty that is causing markets to ask whether this is really a “stress test without stress” – as dubbed in Germany’s media.

Interbank lending in Europe has been half-paralysed since Greek debt woes escalated into a broader banking and sovereign debt crisis. The authorities hope the stress test will prove a magic cure. Last year’s tests in the US were the turning point for America’s banks, but that is because 10 of the 19 banks failed, requiring $75bn (£49.5bn) of extra capital.

Der Spiegel said the test will not include defaults by Greece or other states for fear that this would hurt the credibility of the EU’s new €440bn European Financial Stability Facility (EFSF) designed to shore up eurozone debtors.

Hans Redeker from BNP Paribas said the EU authorities are damned if they do, and damned if they don’t. “The are afraid of provoking another shockwave in the market if they even talk about debt-restructuring, but it will be a hard sell to markets if they don’t.”

There are fears that any inclusion of haircut levels of specific countries will leak out and become self-fulfilling, triggering an immediate market flight and a systemic crisis. “They are playing with fire,” said one German banker.

David Owen, of Jefferies Fixed Income, said the exercise settles nothing. “If you don’t stress-test the worst case scenario, it is not going to reassure anybody. A Greek default is clearly a risk.”

Mr Owen said there is a loose parallel with Northern Rock in the lead up to the crisis when regulators weighed the risk of a property crash, but turned a blind eye to the risk of a seizure in the wholesale funding market – which was the real Achilles Heel.

Much of the damaged debt held by European banks is in portfolio accounts, and therefore does not have to be “marked-to-market” under accounting rules. There are serious doubts about the EFSF rescue fund itself, which has yet to secure a AAA rating or clarify whether any holdings of Club Med debt would have “senior status” that pushed private holders down the food chain – and deeper into trouble. Most banks will not touch Greek, Iberian, and Irish debt until this is clarified.

Some reports have suggested that the test might include a 3pc “haircut” on sovereign debt. It unclear what this means. Mr Owen said that if it covers all eurozone government bonds (including German) this would amount to €47bn of losses, tantamount to a Greek default or greater. But by trying to veil the problem in this way for political reasons the eurozone would merely twist itself into more knots.

The tests will be coordinated by the European Committee of Banking Supervisors (CEBS). It is understood that banks will be forced to raise extra capital if their Core Tier 1 ratios fall below 6pc under the test.

Some German banks would undoubtedly drop below this line if their reliance on risky hybrid capital is penalized in accordance with the likely Basel III rules. These banks failed to take full advantage of the rally over the last year to boost their capital base, much to the irritation of Germany’s regulator BaFin.

There is a wonderful irony in that fact RBS is stating that you can't trust the results coming from a bank which is in such a bad position it's almost totally owned by the UK taxpayer.

Still it's contained.

Deleveraging it appears is still not an option for policy makers it seems.

[Bloo Loo]

I wouldnt worry...your teeth tend to fall out when exposed to fall out.....thats what containment does...its irradiates the container...

[Realistbear]

The economy in the West has effectively collapsed and died. The shams of stress tests, false data and currency manipulation is all we have left. A few countries are actually producing stuff (Germany, Switzerland, Norway for example) but the rest are relying on parasitic industries run by Banksters and their ilk.

[OnlyMe]

The economy in the West has effectively collapsed and died. The shams of stress tests, false data and currency manipulation is all we have left. A few countries are actually producing stuff (Germany, Switzerland, Norway for example) but the rest are relying on parasitic industries run by Banksters and their ilk.

And they keep on shouting for more money.

The end.

[interestrateripoff]

The economy in the West has effectively collapsed and died. The shams of stress tests, false data and currency manipulation is all we have left. A few countries are actually producing stuff (Germany, Switzerland, Norway for example) but the rest are relying on parasitic industries run by Banksters and their ilk.

Watches and chocolate a big export market?

I thought the Swiss economy was the banking sector?

[Bloo Loo]

And they keep on shouting for more money.

The end.

indeed, what use a stress test when a bank requires quantitative easing to shore itself up....bankruptcy...the ultimate test.

[OnlyMe]

indeed, what use a stress test when a bank requires quantitative easing to shore itself up....bankruptcy...the ultimate test.

They also want more government issued paper to peddle through their books, they are incapable of assessing and taking on risk, htey don't invest, econimically they are useless. Modern banks like these are just parasitic, unfit for any purpose pther than for serving their own. Such banks should have been sent to the wall. There will be no receovery (in fact worse no long term positive investment in anything) whilst they are still hanging around like a bad smell and pollluting the economy. Just the fact that they are commenting on the insolvency of others is a farce.

[Deckard]

RBS and other City institutions have warned that Europe’s stress tests for banks are almost completely useless and may will further damage confidence.

Smoke-and-mirrors won't work this time, everyone now knows the score.

And what about Germany's bad bank, are they going to stress test that one too?