The less stressful stress test

Following the u.S. Model, only one stress test was to be simulated in the eu, because the main aim was to calm the markets with acceptable results

Spanish prime minister jose luis rodriguez zapatero initiated the so-called stress test for the banking landscape in europe. He wanted to dispel rumors that spain is on the brink of bankruptcy and doubts about the spanish banking system. Instead of putting the banks through their paces, they tested in a way that would produce the desired result throughout the eu. So all governments could report full. Only 7 out of 91 institutions audited failed. The fact that five of them are spanish savings banks should not reare zapatero. In germany, surprisingly, all the struggling landesbanken passed as well. Only the hypo real estate (hre) is expected to fail. Since they have had a state guarantee for a long time anyway, hardly any negative reactions from the market are to be expected. With atebank, a bank in greece also failed the test.

The usa has shown how to subject the banking system to a so-called stress test, which does not really deserve the name (the stress test for the us banks). The criteria were already so lax in the usa that, for example, a maximum unemployment rate of 8.9% was amed in the worst-case scenario. But soon the rate was also officially above 10% and still stands at 9.5%, despite strong growth in the u.S.A. Unemployment is responsible for countless loan defaults, which is why the death of banks is by no means over. After a record in 2009, this will most likely be broken in 2010. In the current year, the federal deposit insurance corporation (fdic) has already had to close 96 banks. In the entire previous year, the figure was 140. In contrast, in the year before the stress test there were 25 and in the year before the financial crisis only 3. It was no surprise, for example, when the wall street journal reported on a "not so stressful test" and the financial times deutschland of a "smear campaign" spoke ("the entire banking system is insolvent").

In light of the european test conducted by the committee of european banking supervisors (cebs), the wall street journal is now asking whether the test was stressful enough to be worthwhile in the face of a banking system that has been in the "that has lurched from crisis to crisis over the past few months", also to be credible. This had to be formulated as a question until friday because the eu did not disclose the criteria used for testing until the results were published. Here one had learned from the usa. In view of the foreseeably lax criteria, the positive results that were envisaged were not to be talked up in advance.

State bankruptcy not foreseen

But the question of the us newspaper can now be answered. For example, the wall street journal points out in an article that the cebs test did not take into account a default of a state. This alone must be surprising, since there has been a lot of talk about sovereign defaults since december. With greece, a eurozone country has already had to be bailed out, and there is debate about possible bankruptcies in portugal, spain and italy, which is why a rescue package has been hastily put in place.

In addition further serious lack at the test. The test also did not take into account the possible expiration of derivatives and other risky investments. Also left out are the interconnections between the banks and thus two of the core areas that have made the financial crisis what it is today. It was virtually pretended that the domino effects that could be observed after the bankruptcy of the u.S. Investment bank lehman brothers had not occurred worldwide. The months-long process did not examine what would happen if several banks or savings banks were to fail at the same time.

The crisis scenario, which examined whether the tier 1 capital ratio of a bank or savings bank would fall below 6%, also turned out to be somewhat harsher than expected, but the economic crisis in some countries has so far shown that the amed scenarios can be exceeded. For it was only amed that the economy could shrink by 2% in 2010 and by another 1.25% in 2011. This is no more a worst-case scenario than there was such a scenario in the usa. The same applies to the presumed rise in interest rates. An increase of 1.2 percentage points was amed for a three-month term and 0.75 percentage points for a ten-year term. Anyone who looks at the dynamics with which the interest rates for greek, spanish and portuguese government bonds have exploded in recent months can only shake their head at this stress scenario. Even a 20% slide on the stock markets is not a particular stress case, if one looks at the development in the last few years.

In the extended stress scenario, a haircut was also calculated on securities held by the institutions in their books. Discounts have been calculated for various countries. For greece, the five-year rate is 23.1%, for portugal 14.1%, for ireland 12.8% and for spain 12%. Germany is doing quite well at 4.7%. Close to this, a small discount is set for slovakia (5%), denmark and the netherlands (5.2%), austria (5.6%), france (6%), finland (6.1%), malta (6.4%), sweden and cyprus (6.7%), luxembourg and belgium (6.9%), italy (7.4%). The fact that the haircut for slovenia, at 4.2%, was even lower than that for germany may have caused some consternation in germany. Above the average of (8.5%) are also great britain (10.2%), czech republic (11.4%) and poland (12.3%).

But here, too, the test holds a special feature. The haircuts are applied only to the securities that are in the trading book of the institutions. However, only securities intended for sale and therefore valued at market prices need to be accounted for. However, since most of the government bonds are recorded in the bank book, i.E. They are not intended for direct sale, but are held until maturity, they were completely excluded. This, too, does not exactly speak for the hoped-for transparency with which confidence is supposed to be established, and raises further considerable doubts about the real validity of this stress test.

In view of these criteria, it is hardly surprising that in germany, apart from the nationalized hre, all tested banks passed the test. Instead of 6%, the munich-based real estate financier only achieved a core capital ratio of 4.7% under these conditions. But in the view of the financial supervisory authority bafin, hre had in any case been "ou competition" run. Despite the lax criteria, nordlb at 6.2% and postbank at 6.6% only narrowly missed disaster. The result of nordlb is particularly astonishing because, together with helaba, they were the only state banks that did not need state aid.

In spain, not only the savings banks were allowed to be endangered

For spain, prime minister zapatero should not have been so full of words, if you look at the results of this test. Finally, with an angry look at berlin, he had declared that he had passed the stress test against months of resistance from chancellor merkel "enforce" must. He thus suggested that, unlike the spanish banking system, there is a lot wrong in germany. "Germany hides the weakness of its banks with attacks on the spanish economy", seconded the media, which are close to his social democratic government. However, among the 7 institutions that failed the test out of the 91 tested, there are five spanish savings banks. Among them, the recently smeared church savings bank cajasur. But here, too, it is noticeable that caja castilla-la mancha (ccm), which had already crashed last year and was much more coarse, does not appear in the list of the inglorious seven.

In spain, it is emphasized that all banks have passed the test and that only savings banks are affected that have just been forced by law to merge. However, the fact that credit defaults continue to rise in spain does not bode well. It has just been published that in may the rate reached a new high of 5.4%. The fact that the banks, with a ratio of 5.42%, are only slightly behind the savings banks, with 5.51%, raises serious doubts about their real stability for some banks, despite passing the test. This is especially true for banks that are heavily exposed to the mortgage business.

These five spanish savings banks will therefore need the lion’s share of the expected capital requirement of 3.5 billion euros (experts were expecting between 30 and 90 billion). Despite the support of the already merged savings banks caixa catalunya, tarragona and manresa, it is expected that the merger will require a further billion euros. Three other new savings banks associations are in a similar situation, which reinforces the idea that it is mainly the losers of the crisis who have merged. They need fresh capital, although they have already received plenty from the state’s bank restructuring fund (frob). The fact that the eu has just approved spain’s application to continue operating the frob also speaks for itself. Rarely has the merger of several crash candidates later turned into a viable project. Whether it remains with the approximately two billion euros, which spanish savings banks according to data of the stress test became need, may be doubted.

What is also astonishing about the stress test is that despite [http://www.Our site/tp/blogs/8/147391 capital flight] and the enormous problems in greece only the atebank has failed. The state is already the majority owner of the bank of athens, whose core capital ratio is to fall to 4.4% in the crisis scenario. In order not to raise any new worries, the ministry of finance in athens already declared last night that the state will participate in the increase of capital.

All in all, it remains to be seen whether such a test and such results will really calm the markets in the long term and dispel doubts about the stability of the european banking system. Wall street, which was left with the interpretive authority when the results were published after the close of the stock exchange in europe, was not impressed. In new york, although the upward trend continued, the dow jones index rose 1% to 10.424.62 points, but this was mainly due to good results from verizon, general electric and microsoft.