Tuesday 24 October 2017

Market backlash feared over bank stress-test 'whitewash'

Laura Noonan

Laura Noonan

FEARS of a market backlash to the banking stress tests results were growing last night as analysts criticised the parameters of the Europe-wide exercise.

The tests by the Committee for European Banking Supervision (CEBS) found that of the 91 banks examined -- which accounted for more than 65pc of the European market -- seven would need a combined €3.5bn in extra capital to deal with another "very severe" crash.

The other 84 were deemed to have sufficient capital to withstand a double-dip recession and a sovereign debt crisis.

The results were released after Friday's closing bell -- earlier that day Goldman Sachs predicted the combined group would have to raise another €38bn to fortify itself for future shocks, while Barclay's Capital was suggesting €85bn.

"I don't think the market is so stupid as to think that they were so wrong," said Jason Brady, a managing director at Thornburg Investment Management in Santa Fe, New Mexico, which oversees $57bn. "The right explanation here is that the testing was not very rigorous."

Mike Lenhoff, chief strategist at London-based Brewin Dolphin, said the amount CEBS suggested raising seemed "quite trivial" in view of concerns over the sovereign debt crisis.

Neil MacKinnon, global macro strategist at investment strategists VTB Capital, described the tests as "political whitewash rather than a genuine attempt to assure the markets that eurozone banks have balance sheets that could really withstand sovereign risk shocks".


Policymakers hoped the tests would restore confidence, allowing the banking funding markets to re-open, mirroring the experience of US stress testing last year.

"This is not reassuring at all," said Komal Sri-Kumar, who helps to manage $118bn (€91.6bn) as chief global strategist at TCW Group Inc in Los Angeles.

"These tests were set in such a way that most of them would pass. That doesn't say that the banking system is stable.

"I don't think the markets will buy it. We'll have to wait until the Europe markets open on Monday."

In Dublin, analysts expressed concern that the market might "view the tests negatively" given mounting concerns that they had not been stringent enough.

Much of the criticism stems from the way sovereign risk was treated. CEBS modelled a devaluing of sovereign bonds, rather than an outright sovereign default, with a maximum haircut of 23pc applied to Greek holdings. CEBS has also been criticised for applying the discounts only to banks' trading books of sovereign debt and not to the debt they hold to maturity, a position CEBS defended.

A survey by Morgan Stanley found that banks hold just 10pc of their Greek debt in trading accounts while the rest is in the hold-to-maturity banking book.

Figures released on Friday show Irish banks hold relatively small amounts of sovereign debt on either book, which some say could help their share prices. (Additional reporting, Bloomberg)

Irish Independent

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