Stress tests not so stressful | The Mesh Report

Stress tests not so stressful

Christian Tharp, CMT July 26, 2010 0

Friday the Committee of European Banking Supervisors said that 7 of the 91 European Union banks subject to stress tests failed, but with only a combined capital shortfall of 3.5 billion euros ($4.5 billion). Although this seemed to come as good news, it does worry some that the evaluations may have been too lenient.

One German, one Greek and five Spanish banks failed the stress tests and have insufficient reserves to maintain a Tier 1 capital ratio of at least 6% in the event of a recession and sovereign-debt crisis, or worse. The evaluations covered 65% of the European Union banking industry.

The banks that failed were Germany’s Hypo Real Estate, Agricultural Bank of Greece and the Spanish banks that failed were as follows: CajaSur, a merger group led by Caixa Catalunya; a group led by Caixa Sabadell, Caja Duero-Caja Espana, and Banca Civica.

With a supposed capital requirement of only 3.5 billion euros, one concern over the stress tests is that they did not go far enough as to test against the possibility of an outright sovereign default.  The amount of capital needed was lower than analysts predicted, possibly because the evaluations only took into account potential losses on government bonds the banks trade, rather than those they are holding to maturity. Essentially the tests seem to ignore the majority of banks’ holdings of sovereign debt.

The results were released after the close of European stock markets on Friday. The U.S. markets seemed to receive the data well with the Dow up 102 points to close at 10,424, the S&P up 9 points to 1102 and the Nasdaq finished at 2269, up 23 points. The euro was little changed against the dollar, falling 0.02 percent to $1.2896 as of 7:39 p.m. in London.

However, European markets have not seemed to have the same positive reaction thus far today. Britain’s FTSE 100 fell less than 0.1%; Germany’s DAX index fell 0.4% and France’s CAC-40 fell 0.1%.

U.S. market futures remain relatively flat in the pre-market.

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