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Revisiting The Grand Farcade: A Visual Guide To Round Two Of The European Stress Test

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It is no secret that everyone who manages money looks at each and every iteration of the European (or US) stress tests as nothing but a glorified farce, attempting to restore systemic credibility, yet which ultimately always end up hurting it. That the first European stress test identified exactly zero of the banks that failed within months in Ireland is also no secret. However, with Europe once again out of options, here comes stress test round two. For those who care about this grande farcade (sic), here is a simple visual summary. We fully intend to recreate this post some time in March 2012, describing what Stress Test round 3 will look like.

From the London Stock Exchange:

Even before the European Banking Authority (EBA) starts its new round of bank stress tests, the same criticisms that dogged the first round have been raised again – not tough enough, measuring the wrong things, just too woolly generally.

Not so, say EU officials. This time around the test will not be of “liquidity but of solidity,” European Central Bank council member Yves Mersch said in response to the already mounting criticism. The tests will be “more severe” than the previous ones and “I hope that the markets will accept that this stress test is a serious one,” he said.


All of Ireland’s banks passed the test, but just four months later the country’s entire banking system collapsed prompting an €85bn bail-out for the whole country, of which €35bn went directly to the banks.


The tests include a "marked deterioration" in the forecasts for GDP, which the EBA assumes will fall four percentage points from the baseline compared to three in the 2010 exercise. The tests include a fall in share prices of between 10% and 20%, an 11% fall in the dollar's value and short term interest rates to be raised by 1.25 percentage points.

This adverse economic scenario is tougher than in 2010 and deviates more from the baseline scenario than last year. The stress tests will be carried out between March and June and the initial results will be submitted to the relevant national authorities. The results will be analysed and assessed before published later in June 2011.

Some analysts believe that the adverse scenario is still not tough enough. If this proves to be the case, it may be a very long time before the exercise is tried again.

May the farce continue.

Just don't worry it's all contained the Portuguese bailout will ensure that.

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  • 312 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
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      • up 5%

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