EU Bank Stress Test: Commentaries & Market Reactions

Here’s the first commentaries, analysis and market reactions on results of the European Bank Stress Test, revealed by the CEBS, ECB and the EU Commission Friday afternoon. 7 of the 91 banks failed the test. but most of them passed with flying colors.  As expected, wouldn’t you say?

“5 Spanish cajas, 1 German and 1 Greek banks are eliminated on their quest to marry the US taxpayer. 84 other banks will soon be the recipients of far more US taxpayer generosity. And with that the season finale of the farce comes to a close.”

Tyler Durden

The first reactions to the spectacular revealing of the Great European Stress Test are out. Bloggers and certain independent analysts are furious, calling the whole thing a farce and a fake, while politicians and bankers are nodding their heads in a more dimmed recognition of what they’ve known all the time: there’s nothing to worry about. And the euro is strengthening.

For all available details details on the stress test results, click here.

First stop is France, and country economics analyst Caroline Newhouse-Cohen at BNP Paribas. In BNP’s latest edition of their weekly analysis, “EcoWeek”, Newhouse-Cohen writes:

“In the euro zone, the Committee of European Banking Supervisors (CEBS1) released its report on stress tests on Friday 23 July. The tests are designed to measure the solidity and solvency of 91 European Union banks (75% of the banks in twenty EU countries2) in case of a new financial market shock. In an adverse scenario, it was assumed that GDP would contract 3% over two years relative to the European Commission’s baseline scenario for the EU (1% in 2010 and 1.7% in 2011). An additional sovereign shock on top of the adverse scenario was also considered (excluding those held in investment portfolios; not including restructuring or defaulting). Under the adverse scenario, aggregate losses would total €556bn in 2010 and 2011. Tier-1 capital would decline from 10.3% at end 2009 to 9.2% at end 2011, compared with a regulatory minimum of 4% and a stress-test threshold of 6%,” BNP Paribas points out.

And concludes: “As expected, the majority of euro zone banks passed the tests successfully. Only seven establishments would see their tier-1 capital ratios drop below 6% under the adverse scenario. These banks3 have already raised doubts for several weeks, and the respective regulatory authorities are likely to push them to make capital increases to pass above the minimum requirement. The rather positive outcome of this European initiative should help improve the fluidity of interbank transactions. It should also reassure the markets concerning the capacity of banks to finance the economy and to fund the economic recovery.”

Here’s a copy of the newly relished “EcoWeek” from BNP Paribas.

And the reassure us that everything’s fine, she adds an oversight of the market interest rates and foreign exchange rates over the last week:

Interest rates:



EU Calculates Cost Of Nuclear Holocaust At €0.69

Among the financial bloggers are the tone a quite different one.

“Instead of listening to the idiots on TV, we will instead keep a close eye out on LIBOR, Euribor and EONIA: these will present a far better picture of true state of affairs in Europe than any farce of a test ever could,” Tyler Durden at Zero Hedge wrote yesterday.

Today the popular blogger concludes:

“5 Spanish cajas, 1 German and 1 Greek banks are eliminated on their quest to marry the US taxpayer. 84 other banks will soon be the recipients of far more US taxpayer generosity. And with that the season finale of the farce comes to a close.”

And points out the following:

Also Europe finds that :

* Full GoM clean up will be around 2 bucks

* The cost of the Large Hadron Collider was reduced to a couple of dimes

* The US budget “deficit” is estimated to actually be a $100 quadrillion budget surplus

* Merrill’s expense tab at Hustler Club is only $19.95

* etc.

European Bank Investors Have Been Hoodwinked

Reggie Middleton at the BoomBustBlog writes in a comprehensive analysis of the European banking sector that European Bank Investors Have Been Hoodwinked and BamBoozled.

Reggie Middleton

Personally, I consider the European bank stress tests to be a farce; an attempt to Bamboozle, Hoodwink and Dis-inform any who would be naive enough to drink the Kool-Aid – not to dissimilar from the US bank stress tests (see You’ve Been Bamboozled, Hoodwinked and Lied To! Here’s the Proof). CNBC reports that “NO” default scenarios will be played out, which I find to be rather unrealistic since the reasons why the banks are enjoying restricted access to the capital markets is the fear of default! Think long and hard about this…

You are showing signs of HIV, and nobody wants to come near you, make love to you or lend long term to you due to the symptoms of this most unpleasant and deadly disease despite the many proclamations you have made to the contrary. You decide to set the record straight by visiting a prominent doctor to diagnose your issues and placate your associates. The doctor comes up with a prognosis, but simultaneously declares that:

* AIDS (the syndrome), and death have not and will not be considered because the doctor will not let any of his patients catch AIDS or die! Whaaatt!!!??? Does the doctor really have that much control over who catches diseases and who dies? [Analogous to refusing to even consider the potential for default on sovereign debt, as if no European country has ever defaulted before – many have, and many probably will in the future as well). This analogy actually serves us quite well for the ECB has very limited control over who gets sick and how the contagions (both financial and economic) are transmitted (see below).

* The patient will be assumed to operate between 96% and 57.8% efficiency. This is, of course, a problem if the patient truly is terminally ill, for his health should receive significantly more of a…. Well, a haircut.

* Only the patient’s mucous membranes and other very short-lived tissue will be considered for examination, for the patience plans on keeping other body parts for the long term, hence they should not be affected by fluctuations by any potential illness. Yes, I know this statement doesn’t make any damn sense, but then again neither does the ECB excluding hold to maturity and portfolio inventory from the stress tests either. It really doesn’t matter how long you plan on holding said items, if they are permanently impaired in value, then they are permanently impaired, Right???!!! I know, we won’t even consider a default scenario, but since countries do default.. If a default occurs, or more realistically a restructuring, then wouldn’t longer term inventory be impaired – Permanently???!!! In the post A Comparison of Our Greek Bond Restructuring Analysis to that of Argentina I demonstrated how much damage was done to the Argentinian bond holders after their restructuring. Too bad the Argentinian investors didn’t have the all-powerful ECB there to declare that restructuring and default are not part of the rules, hence not allowed. The following is the price of the bond that went under restructuring and was exchanged for the Par bond in 2005.

The BoomBustBlog adds the charts below:

“Price of the bond that went under restructuring and was exchanged for the Discount bond.”


“With this quick historical primer still fresh in our heads, let’s revisit our Greek, Spanish, and Italian banking analyses (the green sidebar to the right), many of which are trying to push the 400% mark in terms of returns if one purchased OTM options at the time of the research release. It may be worthwhile to review the Sovereign debt exposure of Insurers and Reinsurers as well. A quick glimpse at our calculated restructurings are in order as well…”

Read the full analysis here.

Faked, And Not Very Well

“The European stress test results are coming out as you read this – and they were not as good as Meg Ryan’s performance in the deli in “When Harry Met Sally,” Michael Shulman, editor of Michael Shulman’s Short Side Trader, writes:

Michael Shulman


“What will investors think? Right now, nothing — markets are wandering, A good many will think this through over the weekend and return to my thought — if you fake them, it means you cannot do real tests. Why? The banks are in such bad shape that many of them cannot let investors take a look at the books of too many banks, it will cause a run on all the banks. Another group will look more at the math and say wait a minute, any real problems with sovereign debt and that four billion is looking kind of small.”


“What do I think? I am using Occam’s Razor — I had to read the guy in my Medieval Philosophy course at Georgetown, part of my major – and that is, according to Wikipedia, “is the principle that “entities must not be multiplied beyond necessity” (entia non sunt multiplicanda praeter necessitatem). The popular interpretation of this principle is that the simplest explanation is usually the correct one.”

Read the article at Seeking Alpha.

Euro Gains On Test Results

The euro has gained nicely against most major currencies after the test results was published at 18:00pm (CET), as you can see in the charts below:





Remember the guy in the popular TV show from the 80’s – “The A-Team”?

The one who at the end of every episode fired up a big cigar and said: “I love it when a plan comes through!”

Related by the Econotwist:

EU Bank Stress Test: Here’s The Full Package

To Europe From Goldman Sachs On The Stress Test Eve

Financial Authorities See No Point In Stress Testing Norwegian Banks

All Nordic Banks Will Pass Stress Test, Nordea Says

European Bank Stress Tests Are Loosing Credibility

The EU Stress Test: Working The Media


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Filed under International Econnomic Politics, National Economic Politics