Investors and analysts say that unless there are a credible number of failures among the 91 institutions being stress tested, then the whole exercise – whose raison d’être was to scotch skepticism about European banks’ financial strength – risks backfiring.
On Tuesday, German banks – including the poorly capitalised public-sector Landesbanken – indicated in private that they had passed the test, following similar indications in recent days from regulators and politicians in France and Italy, The Financial Times reports.
That followed news on Monday that Hypo Real Estate, the nationalized German property lender, would fail the test. “If HRE is the only German bank that fails, that completely discredits the tests – not just for Germany but for the whole of Europe,” one senior banks analyst said on Tuesday.
Meanwhile, confusion about the parameters of the tests deepened on Tuesday.
Banks from France and Greece told the Financial Times that the so-called haircut being applied to holdings of Greek government debt – the most extreme in Europe – were about 23 per cent, rather than the 17 per cent figure that banks and regulators in Germany and the UK have referred to in private.
Bankers say the impact of those haircuts is likely to be insignificant in any case – explaining in large part why so few banks look set to fail the tests – because the sovereign debt haircuts are being applied only to bonds held in banks’ trading books.
Debt In Different Books
According to research by Morgan Stanley, 90 per cent of banks’ Greek sovereign debt is now held not in trading books but in banking books, where they are designed to be held to maturity.
Under certain circumstances, accounting rules allow banks to switch investments between trading and banking books. Only a few months ago, analysts estimated that 50 per cent of sovereign debt was held in short-term trading books and 50 per cent in banking books.
The Committee of European Banking Supervisors, the umbrella body for the continent’s bank regulators, is due to publish the results of the tests after the markets close on Friday, but it remains unclear how much detail will be published about the parameters of the tests.
Bank executives said on Tuesday that even some of the core questions – for example, whether or not to publish banks’ disclosures about the entirety of their sovereign debt holdings – were still under discussion.
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