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18 July 2011 : European bank stress tests: lacklustre as expected

As expected, the stress tests themselves are widely derided, but then the surprise would have been that they were credible and satisfying for the market...

Roger Doig
Credit Analyst
Fixed Income Credit Analysis


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    As expected, the stress tests themselves are widely derided, but then the surprise would have been that they were credible and satisfying for the market.
    The head of the EBA (European Banking Authority) agrees that a €2.5 billion additional capital requirement for European banks is too low an estimate. The EBA will be able to put pressure on regulators to encourage “near misses” to raise additional equity, but otherwise it will be left to the banks themselves. Note that the majority of banks will be increasing their equity levels anyway (and by many multiples of €2.5 billion) as required by Basel III / SIFI surcharges etc. The EBA tests merely accelerate the speed of capital raising or consolidation for a handful of marginal banks.
    The disclosures were detailed, particularly on sovereign exposures where the duration of government bond holding is disclosed. The general comment is that exposure to Greece, Ireland and Portugal, and also Spain, is widely and thinly distributed outside their respective domestic markets. Large Italian exposures are naturally more widespread. This could be observed from last year’s stress tests too. We will run through each bank to see if there are idiosyncratic credit points in due course. The main standout thus far is that Dexia’s peripheral exposures, which we already know to be among the largest, are skewed to very long (15yr+) durations, which limits the benefit to them of the current round of kicking the can.
    There is also additional disclosure on loan book exposures, but these have been heavily caveated as varying in consistency by the EBA, and the sell side response appears to be muted.
    From a credit perspective, as we expected, very little changes as a result of the stress tests. The German response to the Italian, and other periphery sovereign debt situations, is by far the most important near and medium term factor for bank credit spreads and the ability of banks in those regions to access wholesale funding.


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