European Banks “Stress Test” Nonsense
July 23rd, 2010Seven of 91 banks failed (breaking on CNBC), but note the part in bold below.
Via: Bloomberg:
The 91 banks undergoing stress tests were examined on European sovereign debt losses only for the bonds they trade, rather than those they hold to maturity, which may make the tests easier to pass.
Portfolios of sovereign five-year bonds were tested on trading books with banks needing to keep a Tier 1 capital ratio of 6 percent to pass, according to the Committee of European Banking Regulators, which is overseeing the exams. The stress tests assume a loss of 23.1 percent on Greek debt, 12.3 percent on Spanish bonds, 14 percent on Portuguese bonds and 4.7 percent on German state debt.
“The haircuts are applied to the trading book portfolios only, as no default assumption was considered,” according to a confidential European Central Bank document obtained by Bloomberg News dated July 22 and titled “EU Stress Test Exercise: Key Messages on Methodological Issues.”
European Union regulators are examining the strength of banks to determine if they can survive potential losses on sovereign-bond holdings. They are counting on the tests to reassure investors about the health of financial institutions from Germany’s WestLB AG and Bayerische Landesbank to Spanish savings banks as the debt crisis pummels the bonds of Greece, Spain and Portugal.
‘Lenient Treatment’
The “lenient treatment of bank book exposures” is part of a “sugarcoating” of the stress test results, Sony Kapoor, managing director of policy group Re-Define Europe, said before the criteria was released.
