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Applying A Basel Iii Tier 1 Stress Test Threshold Implies E2.6 Trillion Of Assets In 39 Banks Impaired By Equity Undercapitalization

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With the assumptions and conditions for the stress test pulled straight out of CEBS' collective bottom, it is no surprise that a mere 7 banks for a total $246 billion in affected assets end up being defined as undercapitalized. But what happens when instead of using a 6% Tier 1 capital threshold, a Basel III 8% Tier 1 is used? Something log scale worse. As Austrian Der Standart journalist Lukas Sustala points out, and as demonstrated on his chart below, the failure rate goes up exponentially: instead of 7 banks failing, 39 of Europe's biggest banks would be undercapitalized, and the impaired assets would amount to a whopping E2.6 trillion, requiring at least E30 billion in incremental equity capital, on top of the hundreds of billions already infused by European governments. In Lukas' words: "The stress tests were a farce (taking no account of counterparty risk or a sovereign default), but at least they provide some good data points (I currently look into all the sovereign holdings of the individual banks, so there is more to come). 39 banks fail the 8% criteria."


And for those who just can't get enough of peeking at the imaginary numbers behind the farce theater's curtain, here is Goldman's most recent essay in which they attempt to validate why they were so blatantly wrong (i.e., pessimistic) on the Stress Test's outcome last week.

See link for the Giant Squid report.

Luckily it's all contained...

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European banks who only just scraped through a health check could look for over 25 billion euros (20.9 billion pounds) in new capital, while Spain's smaller lenders set out to reassure investors on Monday that they too can raise funds.

Of the 91 banks tested, seven failed, including five from Spain, and another 17 barely passed the EU tests which have been widely criticised as not demanding enough.

The tests were aimed partly at opening the door to funding markets for a batch of southern European banks and lowering costs for other lenders, and analysts said it would make sense for banks to seek to raise the capital they would have needed had the test criteria been tougher.

"Those that are at the margin may as well raise equity to dampen down fears ... The sums of money involved are really relatively small," said Ian Henderson, who runs a global financials fund for JP Morgan.

"We can navel gaze until we're blue in the face about this (stress test process). Most people are going to be absolutely fine."

Results announced on Friday showed the seven that failed need to raise just 3.5 billion euros ($4.5 billion), far less than expected.

More money to be sucked out of the global economy?

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  • 396 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?

      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%

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