Stress Tests

The results for the stress tests on 91 European banks were released yesterday evening.   A reasonably detailed description of the tests and results is available from the Committee of European Banking Supervisors’ (CEBS) website.   The results for AIB and BOI are available from the Irish Central Bank’s website.   As Michael Hennigan points out, the overall passing score was 84-7, and so the release of the results has not quite made the waves expected.   Both Irish banks passed with a bit to spare despite the relatively high Tier 1 target of 6 percent.   However, the results factored in capital raising plans to the end of the year, and the jury is still out on how much of the 7.4 bl. AIB can achieve without additional government help.  

Some analysis here: Irish Times; Irish Independent; Financial Times.

26 replies on “Stress Tests”

French Fin Minister Christine Lagarde said a “major” sovereign debt crisis was assumed rather than a complete debt default.

See 4th video of press conference given by the CEBS, discussing results and methodology:

This has been the best week for the Eurozone in a while: a rebound in manufacturing and services and the sharpest rise in German business confidence since reunification 1990.

George Soros and the other doomsayers can eat boiled crow!

It would have been astonishing if AIB and BoI had failed the stress test given that they had already been subject to stress tests by Mr. Elderfield. I recall there was a lot of grumbling about the figures he required AIB to raise (gutting a viable business was one I heard), but with a capital cushion of only 293 mn in a stress scenario (which is based on forseeable stress), it appears he was accurate in the current environment.

Mind you, Mr. Mathew’s thinks that AIB needs 10 bn…

There is a bit of a difference between stress testing ice on a lake for a game of hockey and the crossing of a truck convoy. Which is this. Bloomberg and the economics Prof’ from Dartmouth seem to think it’s too the skater end.


So does Prof Dolf van den Brink of the University of Amsterdam

The increasingly heard criticism of these bank stress tests being to ‘mild’ is not of unimportance as it, of course, puts the reliability of these tests to question, more so because so much interest is vested in the passing of this test.

As European countries (among others) have funneled money to banks, who subsequently pass these tests and as now many banks are a liability OF the sovereign states, why not design a stress test for these countries?

@Michael Hennigan

I think the “doomsayers” are saying that these rebounds are the result of stimulus packages/schemes slowly finding their way to the real economy. However when these programs end, as many now are, we shall have a new crisis in a global economy weakened by more debt.

I hope they’re wrong, I’m not sure they are.

The ECBs/ Brussels policey is deeply flawed.
Its primary goal is to protect its client banks and their precious credit money, meanwhile it preaches fiscal austerity to its vassal states and produces little more then survival levels of base money
People are confusing the well being of banks with the health of states.
This is why we here calls for efficiency rather then productivity within elite circles.
Efficiency requires no capital but productivity increases need capital that the banks do not want to build as that would destroy their profits.
Why anybody of integrity should be celebrating this attempted transfer of wealth is beyond me.

There’s no chance they pass the stress tests if done legitimately since the haircuts on our sovereign debt would mean all the banks have large capital needs. A bankrupt sovereign can’t keep bailing out bankrupt banks. The trick here was guiding the banks that they don’t have to mark down sovereign bonds if they don’t plan to sell them. Mr. Elderfield supervised it all and, like all the european regulators, did not want to second guess his own previous work. They all know these are a farce, but, it is one more attempt to trick the public into thinking it is all ok.

KC: totally agree, this wealth transfer to bank creditors from taxpayers will harm us for decades.

Imposing a haircut on soveeign debt presupposes European Sovereigns are going to default on their obligations.

Did you find the levels of haircut interesting? To me it says that the sovereigns might default on the interest payments, but that the capital might be, eh, ‘underwritten’!

@ hogan,

As far as I can tell, only the trading postitions have been haircut while the core hold to maturity books have been left alone. To me this says that the bond markets might assign probabilities to a sovereign default ranging from zero to 20% plus (Germany to Greece) but that eventually the chances of such a default are low or at least years away in the case of the peripherals. I am not a bond expert so I await the judgement of the Eoins.

In the end, sovereigns will cut budgets or raise taxes to avoid default. Collectively the EU could also decide to pursue QE to inflate the debt away (over the BUBA’s dead body of course).

The “Pass” Results for AIB and BoI in the EU Capital Stress Tests are very misleading….bordering fanciful, almost absurd!
Consider….If AIB and BoI are indeed so well capitalised, then it should be very easy, at this stage, for the Government to remove the State Guarantee on Customer Deposits.

I think you’ll agree that, if the Government at this point even reduced the Guarantee on Deposits to a Deposit ceiling of €100K , there’d be an instant huge rush to get Deposits out of the banks!
So much for the Banks being well capitalised!
Stress Test Eurocrats…. GET REAL!!!

In the case of AIB, the EU’s Capital Stress test assumed AIB raising the €7.4bn required re-cap by this year-end. This is more smoke and mirrors!
But what’s new?! The Government has a proven 100% preference for mis-information and untruths!
The Eurocrats might have considered giving both Banks the following new Grade… fianna “FAIL” !!

By the way AIB’s correct immediate min re-cap requirements are €10bn (not €7.4bn stated by the Minister and the Central Bank and Head of Regulation in March 2010, based on Loans assets information supplied by the Bank at the end of 2009 and very early in 2010 which we now know was unreliably optimistic).)
And BoI’s correct immediate min re-cap requirements are €6.5bn (not the €3.65bn stated by the Minister and the Central Bank and Head of Regulation in March 2010, based on Loans assets information supplied by the Bank at the end of 2009 and very early in 2010 which we now know was unreliably optimistic).)

tull mcadoo

That really is amusing in a soveeign way.

“Imposing a haircut on soveeign debt presupposes European Sovereigns are going to default on their obligations.”

I’m not familiar with the “soveeign”.

This would be a thing of your imagination.

By the way what makes you think that Greece and Ireland will not default on “their obligations”?

Is Germany “Sovereign”?

Is Greece?

Is Ireland?

Good God tull, haven’t you worked it out yet?

It is the intention of the ECB that Greece and Ireland WILL default.

That’s the game.

Wake up.

@Tull Mcadoo
Quantitative easing as done by the various central banks will no longer work as they are attempting to increase debt when debt has reached its limit due to the global energy crisis.
In effect we can no longer draw on the wealth of the future as the future is not bright or even orange.
The only effective way for central banks to keep the debt system operational is to increase base money and sacrifice credit money via bidding up the price of gold until it is close to or equal to the M1 money supply.
The Volcker policey of killing gold via super high interest rates is no longer possible as the physical capital no longer exists to run down.
We have reached the true endgame of Dollar hegemony.
My only fear is that Washington will use the last ace in its hands to ignite a global war.

Just as a matter of interest, hat are the criteria to have been included in this stress test?

I note Wolfgang Munchau’s criticisms in the Times today that German institution KfW was left out (state-owned and bank-like in its activities but not technically a bank).

Was their criterion realting to size, state-ownership etc?

How come Anglo or INBS weren’t included for instance?

@ Rob
As regards Anglo & IN
1. because they are not systemically important?
2. because they are no longer fit for pupose?
3. because the biz plan is lost in the post?

Why is IN still running radio adds saying it is open for mortgage business?

@ Tull

the banking book vs trading book issue is complicated. You dont have to mark to market on the hold-to-maturity book, unless there’s a serious probability of default (not sure on the exact accounting/regulatory wording on that, anyone?). You could argue that having a banking supervisor including a sovereign default in a stress test scenario (or similarly have an EU official actually admit that default is likely) makes it a “serious probability”, and that marks should be taken all the way into the banking book right now. Likewise, you could then also argue that they are no longer “risk free assets” if default is being considered, and so capital needs to be placed against them right now. This would destroy their balance sheets overnight.

re probability of default – i think the bond markets are definitely assuming an eventual Greek default (20yr bond trades at 50 cents, 5yr CDS @ 760bps), question is more about the nature of the restucturing. Bloomberg reckons a 5yr Greek govvie has about a 74% chance of defaulting before maturity given current price and CDS (though the formula they use isnt perfect).

Also, the stress test for Greek debt actually comes in with a haircut BETTER (albeit only slightly) than the current market pricing, but WORSE for the similar Irish/Spanish/Portugese debt. As such, you could argue that it does at least ‘stress’ the latter holdings, while actually ‘relaxing’ the problems of holding the former. If nothing else, at least the disclosure of sovereign debt holdings makes it easier to make your own assessment of different banks under sovereign default scenarios (except Ze Germans). In particular, BOI seems to hold almost no government debt other than a relatively modest amount of Irish debt.

Just to let you know Citi have released a research piece saying that 24 banks would have failed the stress test if the banking book was included. One Irish bank would have failed. Haven’t read the piece so yet not sure who but will link it when I get a chance.

@ Gavin

read it. AIB is the obvious one that failed! Basic breakdown…

12 x Spain, 7 x Greece/Cyprus, 3 x German, 1 x Italy, 1 x Ireland.

@ Gavin

sorry, didnt read the research piece itself (cant find it), but read a summary on it on Bloomberg.


Note that AIB only passed the stress test on the assumpton that it raises the required capital. Bit like saying I passed the exam on the assumption I got the questions correct.

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