Tag Archives: European Central Bank

Another Stress Test – Another Media Circus

Hmm…must be that time of year, or something..  Anyway – European bankers are gearing up for another stress test. Yes, their third. But, hey! This time they promise to get it right.  The ECB has even hired the best external stress tester in the business to do the job.  US-based financial consultancy firm Oliver Wyman, a company who has a proven track record for coming up with the right numbers. However, not always the most accurate ones.

“This is the last opportunity to reestablish confidence in the European banking system.”

Jörg Asmussen

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Stress testing of European banks is actually one of the most entertaining parts of the financial crisis. It’s almost hilariously funny to watch the troubled bankers desperately trying to cork a swiss cheese with a soft gun – the holes just multiply and keeps getting bigger.

sterss 1For every “the worst is over” statement, the laughter grows… We’ve gone from booing to cheering…

And the preparations for stress test #3 are also promising.

strress 4

Last week the ECB announced that it had hired the US-based consultancy firm, Oliver Wyman, to conduct the test.   These guys are no strangers to the European stress testing.

  • In 2006, it famously said the Anglo-Irish Bank was the best bank in the world. Three years later, the bank had to be nationalised and almost bankrupted the Irish state, which then needed a euro zone bailout.
  • In 2012, during the Spanish bank bailout, Oliver Wyman provided the euro zone decision-makers with the numbers they expected and which were politically acceptable – around €60 billion instead of a much larger gap that the banks actually had.
  • Also 2012, Oliver Wyman did consultancy work in the Portuguese bailout, according to the central bank of Portugal.

The EU observer writes:

“The worry in euro zone central banks, according to one insider, is that if banks are reviewed too thoroughly and their problems exposed, they will stop lending and revive the financial crisis.”

stress 2Thanks for carving it out, but I think we kinda guessed that already.

But there’s another factor in play this time.

You see, the ECB is planning to step up to the role as EU’s chief supervisor next year and I believe they want to know what they’re supposed to supervise.

stress 5The ECB plans to put 130 major European banks to the test before it assumes regulatory supervision of the institutions in the fall of 2014.

“This test is not a threat,” says Jörg Asmussen, former state secretary in the German Finance Ministry, now  a member of the executive board of the European Central Bank (ECB).

“But after two failed stress tests, this is the last opportunity to reestablish confidence in the European banking system.”

stress 3I’m sorry, but I think that ship sailed the moment you signed the deal with  Oliver Wyman, Mr. Asmussen.

Additionally, many substantial estimates have already been made over the potential magnitude of the gaps the test will uncover.

stress 7SPIEGEL Online reports that Deutsche Bank estimates that Europe’s banks will need €16 billion in additional capital. Depending on which criteria the ECB applies in its tests, the gap could be much bigger.

The Bundesbank, Germany’s central bank, has just estimated that the seven largest German banks alone need an additional €43 billion in capital to satisfy the new international capital requirements.

stress 8I don’t think any stress test dares to go higher than that!

A comparison with the United States gives indications on how bad shape the Europeans really are in.

US financial groups are reporting record profits, while banks in the euro zone have lost more than €80 billion ($108 billion) in the last two years. In the United States, 10 times as many ailing banks were closed and balance sheets were more consistently relieved of bad debt than in the euro zone.

stress 6

The European leaders seem to have  failed to adequately address their banking crisis.

But they won’t give up!

So, what can we expect in the next 8 to 10 months?

stress 10My guess is – for what it’s worth – is that we will see a slow, dramatic build-up. with ECB’ers and politicians lining up to give their pledges about the truth and nothing but the truth, followed by a series of suspicious leaks, causing some market turmoil and a little bit of liquidity squeeze, and by this time next year the ECB will take on the European banking supervision with a huge off-balance sheet and the uncertainty of the euro zone bank sector will be unchanged.

stress 11

And finally we start all over again with stress test #4.

We can party for ever!

 

Full history of European bank stress testing:

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European Crisis Not Contagious – Banks Are

The International Monetary Fund (IMF) have released a stack of reports and papers over the last couple of days, including the one stating that the Greek bailout operation has been more or less – a fiasco, so far. But there’s more: New research indicates that the international banking  is continuously increasing their risk taking and that more any more trouble with the European banks may have severe spillover effects on  financial institutions outside Europe,

“Both German and French banks mostly transmit/receive shocks to other European banks, especially in the UK. French and U. banks pre-crisis also appear to have strong spillover to Russia. Outside of Europe, spillover are largely confined to the US.”

Hélène Poirson/Jochen Schmittmann

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The average sensitivity to European risk, specifically, has been steadily rising since 2008. Banks that are reliant on wholesale funding, have weaker capital levels and low valuations, and higher exposures to crisis countries are found to be the most vulnerable to shocks. The analysis of bank-to-bank linkages suggests that any globalization of the euro area crisis is likely to be channelled through UK. and US banks, the research paper says.

The report “Risk Exposures and Financial spillover in Tranquil and Crisis Times: Bank-Level Evidence” provided by Hélène Poirson and Jochen Schmittmann was released yesterday in the shadow of IMF’s Greek audit report.

(Transcript of IMF press briefing on Greece here.).

This report is not necessary reflecting the official IMF view, but provides some interesting details on who will influence who if more trouble occur.

The researchers have discovered a clear pattern of interconnectedness between European banks.

“French and German banks co-move strongly only with selected US financial institutions, while UK banks are connected strongly with both Asia (pre-crisis only) and the US (in both periods).”

“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”

12579631569zN4br“This last finding suggests that the estimated spillover effects capture pure risk transmission across banks (contagion) rather than shared sensitivities to macro-financial variables.”

Moreover, the researchers have mapped the connections between the individual institutions.

“The estimation framework allows us to highlight the presence of “clusters” of interconnected banks that tend to co-move together more strongly than with other banks, either due to inter-bank linkages (counterparty relationships, interbank-lending) or the exposure to common vulnerabilities.”

A few examples

german spillover

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french uk spillover

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  • Large German banks appear to co-move strongly either with other German banks or with other European banks.
  • Spillover from German banks to other European banks are most pronounced in the case of French and U.K. banks and, to a lesser extent, in the case of Dutch, Belgian, and Swiss banks.
  • During the subprime crisis and in the post-crisis period, a Franco-German cluster can be detected comprising Deutsche Bank and BNP Paribas and a UK-German cluster comprising Commerzbank, Barclays, and RBS.
  • None of the banks from peripheral crisis European countries (GIIPS) are found to co-move in a significant way with the largest German banks.
  • Spillover from German banks to other regions appear limited to the US: prior to the subprime crisis, two of the large German banks seem to co-move significantly with banks in the U.S. (namely, Deutsche Bank with Lehman Brothers and Hypo Real Estate with Goldman Sachs)25; during and following the subprime crisis, Freddie Mac and Fannie Mae have synchronized returns with the largest German financial institutions (Deutsche Bank, Commerzbank, and Allianz), which in turn can be traced back to the latter’s sizeable holdings of subprime portfolios and related exposures to US real estate.

Conclusions

“Similar to German banks, the spillover of French banks to other regions are largely limited to U.S. financial institutions and can only be detected since the onset of the subprime crisis.”

“The financial spillover of U.K. banks, by contrast, reach beyond Europe in both periods. Pre-crisis, there is empirical evidence of strong co-movement of US, Indian and Chinese banks with U.K. banks; during the subprime crisis and post-crisis, spillover to U.S. banks are dominant and the analysis does not detect any co-movement with banks in other regions.”

“In summary, we can tentatively conclude from the analysis of bank-level spillover that direct financial spillover from the EA banking and sovereign debt crisis transmitted through the equity markets outside of Europe are likely to be confined to US banks and financial institutions. Indirectly, however, given the role of the US as a global financial hub, such spillover – if they were to intensify – could potentially transmit more widely to systemic banks in other regions (Asia, Latin America, and Middle East).”

“The analysis in this study leaves unspecified the channels of transmission of financial spillover both within countries and across borders. While this undertaking is beyond the scope of this paper, it would be an important avenue for further research.”

Definitively!

(Download the full report here.)

20111023_DATAPOINTS-popup_large.

More fun stuff:

Other possible related articles:

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Neutral Stupidity

The EU lawmakers are about to finalize rules for a single supervisory mechanism (SSM) coordinated by the ECB. The European Commission is expected to table legislation for a resolution mechanism to wind up ailing banks within the coming months. European Central Bank (ECB) chief Mario Draghi said on Monday in the European Parliament that a euro zone banking union will need a common resolution fund, and that it has to be “fiscally neutral over the medium term.” How can another European bank bailout fund be fiscally neutral?

 “The European Resolution Fund should be backed by a public backstop mechanism to ensure that it would be fiscally neutral over the medium term.”

Mario Draghi

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Yup..neutral, but only over the medium term. Sooner or later the taxpayers will have to pay for this bailout, too…

Speaking with MEPs on the monetary affairs committee, Draghi said that the resolution fund should be financed via levies to safeguard against having to “recourse to taxpayer money,” the EUobserver.com reports.

Levies, hu?

ESMHere are some related words:

Also, the European Resolution Fund “should be backed by a public backstop mechanism,”  Mr. Draghi added, to ensure that it would be “fiscally neutral over the medium term.”

I’m sorry, but this sounds like pure nonsense to me.

There’s nothing new here – just another way to ensure that the bailout mechanisms already set up by the EU  leaders – the European Stability Mechanism (ESM) and the European Financial Stabilisation Mechanism (EFSM) – will still be in place when the European banking union becomes a reality.

But the need for a pan-European resolution fund is widely accepted among most EU lawmakers. However, some countries fear it could lead to their taxpayers financing bank rescues in other countries.

Well, I think they’re on to something….

Meanwhile, Draghi continues to kick the can, downplaying the recent diplomatic row over the exchange rate policy of the euro, dismissing it as “excessive” talks of a currency war involving the euro zone, Japan and the US.

He also said that the ECB did not regard the euro zone exchange rate as “a policy target, but it is important for growth and price stability.”

Important, but not a target….

And, according to the bank’s economic forecasts, the euro zone economy will fall by 0.3 percent in 2013, although Draghi indicated that he expected “a gradual recovery later this year.”

Heard that one, too…..quite a few times over the last five years.

bailout_packages

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