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EU Stress Tests Show Problems Are ‘Manageable,’ Townsend Says

Results of the stress tests of 91 European Union banks show the region’s problems are “manageable,” said Gary Townsend, chief executive officer of Hill-Townsend Capital LLC in Chevy Chase, Maryland, a hedge fund that specializes in financial firms.

Seven of 91 banks subject to the tests failed with a combined capital shortfall of 3.5 billion euros ($4.5 billion), lenders and regulators said today, stirring concern the evaluations weren’t strict enough. Townsend made his comments in an interview with Bloomberg News.

On the results:

“The shortfall is 3.5 billion euros, and even if it were 10 times that, that strikes me as a very manageable number. Just as a $63 billion shortfall, setting aside GMAC, in May of 2009 was eminently manageable for the U.S. banks.”

“The shortfall seems to be concentrated mostly in less important institutions, that if they were closed and resolved, wouldn’t particularly be missed.”

On whether the tests were stringent enough:

“We can complain about the competence of the stress-testing, and whether it was sufficiently stressful or fell short in important particulars, and it seems to me it probably did, but we heard that too in the case of our stress test. The market reaction in the U.S. was initially negative, and the banks have made a very impressive recovery since then.”

On whether banks can raise capital:

“For the U.S., our experience was that the banks, even those that failed, could go out and raise additional capital, and it didn’t cause them to sweat particularly to raise that capital. Wells Fargo announced its capital raise on the day that stress-test results were announced, and it was oversubscribed.”

On whether more frequent tests are needed:

“We hopefully won’t have financial panics every year going forward. These are rare events, and we’ve got to regulate ourselves accordingly. We know regulators didn’t do their jobs for a long while, and that contributed to the creation of conditions that were susceptible to panic. We can’t and ought not to capitalize ourselves to a level that would protect us from a financial panic all the time. It’s too costly. What we need are regulators that do their job properly and are attentive.”

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