European Bank Stress Tests Compromised by Greek Non-Default, German Mutiny
EU Stress Tests Compromised by German Mutiny
John MacDougall/AFP/Getty Images
View of the headquarters of the Landesbank Hessen-Thueringen (Helaba) in Frankfurt, Germany.
View of the headquarters of the Landesbank Hessen-Thueringen (Helaba) in Frankfurt, Germany. Photographer: John MacDougall/AFP/Getty Images
July 15 (Bloomberg) -- Simon Maughan, co-head of European equities at MF Global, talks about the stress tests for European banks. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)
July 15 (Bloomberg) -- Chris Skinner, chief executive officer of Balatro Ltd., talks about the European Banking Authority's stress tests of banks and the outlook for the debt crisis in the euro zone. He spoke yesterday in London with Bloomberg's Caroline Connan. (Source: Bloomberg)
July 15 (Bloomberg) -- Jean-Pierre Lambert, an analyst at Keefe, Bruyette & Woods Ltd, discusses the outlook for today's stress-test report by the European Banking Authority. He speaks with Owen Thomas on Bloomberg Television's "Countdown." (Source: Bloomberg)
July 15 (Bloomberg) -- Sony Kapoor, managing director of policy group Re-Define Europe, discusses the outlook for today's stress-test report for 91 banks by the European Banking Authority. He speaks with Francine Lacqua on Bloomberg Television's "On the Move." (Source: Bloomberg)
July 14 (Bloomberg) -- Former Federal Reserve Chairman Paul Volcker talks with Bloomberg's Maryam Nemazee about negotiations between lawmakers on whether to raise the U.S. debt ceiling. Volcker says the U.S. may miss paying some bills on time due to the political stalemate. Volcker also discusses monetary policy, U.S. regulation of the financial industry and Europe's sovereign debt crisis. (Source: Bloomberg)
Landesbank Hessen-Thueringen
John Macdougall/AFP/Getty Images
The headquarters of the Landesbank Hessen-Thueringen (Helaba) are seen in Frankfurt.
The headquarters of the Landesbank Hessen-Thueringen (Helaba) are seen in Frankfurt. Photographer: John Macdougall/AFP/Getty Images
European regulators’ attempts to bolster confidence in the region’s banking industry today are being undermined by their unwillingness to test for a Greek default and a mutiny by Germany’s Landesbank Hessen-Thueringen.
The European Banking Authority will release the results of the stress tests for 91 banks as part of an effort to reassure investors the region’s banks have sufficient capital. Helaba, as the landesbank is known, refused to allow the EBA to publish its results in full, saying the EBA’s data “would lead to a halving of the core capital without legal grounds.” German regulator Bafin has also attacked the London-based EBA. Bafin Chairman Jochen Sanio said last month the watchdog lacks “legitimacy.”
The assessments are the first by the EBA since it was set up earlier this year. Last year’s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros ($5 billion) more capital, a 10th of the lowest analyst estimate. The EBA can’t force banks to take part, and can’t test for a sovereign default, which policy makers are struggling to avoid. Greece has about a one in 10 chance of avoiding default, credit default swaps show.
“The EBA has no teeth,” Bob Penn, financial-services partner at Allen & Overy LLP, said in a telephone interview in London. It can’t “make requirements from any individual bank because the framework was set up to allow national regulators to keep supervisory powers,” he said. “This isn’t Helaba poking a stick in the eye of the EBA, it’s Bafin.”
Results Released
To pass the stress test, the banks being scrutinized will need to maintain a core Tier 1 capital ratio of more than 5 percent in a stress test. The criteria include a review of how lenders would handle a 0.5 percent economic contraction in the euro area in 2011, a 15 percent drop in European equity markets, as well as trading losses on sovereign debt not held to maturity. The results will be published from 5 p.m. U.K. time today.
“The new authority has been struggling to have more severe tests than last year,” Charles Wyplosz, director of the International Center for Money and Banking Studies in Geneva, said in a television interview with Tom Keene on “Bloomberg Surveillance” yesterday. “Last year was recognized as a joke. The new authority wants to be tougher, but I don’t think they are tough enough to convince the market,” he said. “The real question is: do we assume there is a serious default on serious public debt?”
Greek Contagion
The Bloomberg Europe Banks and Financial Services Index of 46 companies was little changed at 10:36 a.m. London time, after falling in eight of the previous nine trading sessions amid concern the region’s sovereign debt woes will spread beyond Greece, Ireland and Portugal, the three nations that have received bailouts from the European Union and International Monetary Fund. The index has declined 11 percent this year.
The yield on two-year Greek notes rose above 32 percent this week and the extra rate investors demand to hold 10-year bonds relative to German bunds of similar maturity was 14 percentage points. Credit-default swaps indicate an 86 percent chance Greece will fail to meet its commitments within five years, according to CMA prices.
Concern about Greece triggered a surge in 10-year borrowing costs for Italy and Spain this week to the highest since the introduction of the euro in 1999. Italian notes rose as high as 6.02 percent and Spanish bonds climbed to 6.31 percent. The cost of insuring Irish and Portuguese government bonds also hit records this week, implying a 60 percent chance of default.
‘Depth Charge’
“The sovereign debt default problem is the depth charge to the credibility of this exercise,” Penn said. “There’s nothing the EBA can do about that because it’s politically unthinkable.”
Standard & Poor’s own stress test, published in March, found European banks would need as much as 250 billion euros in fresh capital if faced with a “sharp” increase in yields and a “severe” economic downturn. In contrast, a survey of 113 investors by Goldman Sachs Group Inc. last month showed they expect banks to raise 29 billion euros after the tests.
The priority is “that these tests are consistently and conservatively applied” to make them “thorough, checked and effective,” the EBA said in an e-mailed statement.
‘Connect the Dots’
The EU had been counting on a 12-person review board to restore credibility to the bank capital exams criticized last year for being too lax. The reviewers have been checking more than a million data sheets provided by banks as part of the exams for the past six weeks, according to the EBA, and disputing figures with banks and national supervisors where their own calculations are different.
They have also boosted disclosure: Lenders will this year be made to disclose more information than before, giving a total of 3,000 data points compared with 100 in 2010. The publication will include information on capital levels, estimates for profitability in 2011 and 2012 as well as the size and maturity of their holdings of sovereign debt, the EBA said this month.
“The stress tests are flexing the banking system for a shock, but not a particularly vicious one,” Jefferies International Ltd. analysts led by Marchel Alexandrovich wrote in a note to clients yesterday. “Still, the results of the stress tests should help the markets further connect the dots between the various European banks.”
‘Skeletons’
Banks had challenged the decision to provide profit estimates because they may be lower than figures published by some lenders, said four people with knowledge of the process. Firms were concerned the disclosure could trigger a decline in their stock prices, according to one of the people.
The risks to financial stability from analysts using European Union stress-test data to conduct their own exams on banks “should not be underestimated,” according to a confidential document prepared by EU officials. There is an expectation the results will be “challenged by market tests” aiming to address “the perceived weaknesses in the design,” according to the draft document obtained by Bloomberg News.
“By Monday morning, we should know where the skeletons lie precisely,” Alexandrovich said. “With 10 pages of disclosure due for each bank, there may be plenty of them.”
To contact the reporters on this story: Ben Moshinsky in London at bmoshinsky@bloomberg.net;
To contact the editor responsible for this story: Anthony Aarons at aaarons@bloomberg.net
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