ECB makes progress with asset quality review, and confirms stress test parameters for comprehensive assessment Post author By Philip Lane Post date February 3, 2014 here. Categories In Uncategorized 14 Comments on ECB makes progress with asset quality review, and confirms stress test parameters for comprehensive assessment ← Economics and Finance Teaching Before and After the Crisis → Ireland’s Report Card: February 2014 14 replies on “ECB makes progress with asset quality review, and confirms stress test parameters for comprehensive assessment” They should get the NCT to run the test. Set up a chain of approved garages and no favouritism. A credible process and everyone knows what a pass means. Giving everyone a pony is not the way to do it. ECB makes progress with asset quality review, and confirms stress test parameters for comprehensive assessment The EBA needs to do the job before the context deteriorates http://www.ft.com/intl/cms/s/0/3ef1bc22-8a90-11e3-9c29-00144feab7de.html “..The exercise will use a definition of non-performing exposures that has been agreed with the EBA, which means that every material exposure 90 days past due will be classified as non-performing even if not recognised as defaulted or impaired..” or in other words we can identify and even classify the loans in serious bother but we don’t necessarily have to provide for them in our accounts which means our capital is protected…..for now. Sounds like a cousin of the artist formally known as the kicking can. He hasn’t gone away you know. @Yields or Bust I wondered about that sentence from the press release that you quoted above, viz “which means that every material exposure 90 days past due will be classified as non-performing even if not recognised as defaulted or impaired..” What does it mean? On reading I think your interpretation may be questionable. To me it reads that all loans in excess of 90 days in arrears, must be provided for as a non performing loan, even if they are not CURRENTLY recognised as defaulted or impaired. The question then would be, what level of provision is required and of course that may be an entirely subjective percentage, that in turn could be interpreted in 124 different ways by the 124 different banks involved. However, the 90 day past due criteria will send shivers down the spines of the national regulators. [Bankers themselves don’t do shivers, it seems] The >90 day arrears is the kind of simple criteria that is hard to avoid hiding from, whatever about the subsequent provision. It is in theory plausible to argue for a 100% provision for all loans in excess of 90 days in arrears, i.e write the loan down to current collateral value. Such a method would definitely shake a few national banking systems! FYI http://www.ft.com/intl/cms/s/0/09459ac4-8cea-11e3-ad57-00144feab7de.html?siteedition=intl “Some commentators have said there are no backstops so the ECB may be fudging the thing with fears of the consequences: that we will not do. We will uphold the reputation of the ECB and we will not put it at risk,” Mr Constâncio said. “The backstops are there. We will absolutely conduct an exercise which will be very demanding and very rigorous.” They are? ‘No Names’ morphs to ‘No Derivatives’. What stress? http://www.irishtimes.com/business/sectors/financial-services/scale-of-irish-mortgage-default-is-unprecedented-1.1676749 Paul De Grauwe in Economist article on deflation with links to related articles. http://www.economist.com/blogs/freeexchange/2014/01/deflation-euro-zone-1 From an article on Emerging Market Contagion. As the Belgian economist Paul de Grauwe recently noted, debt deflation can occur even when official inflation rates are positive. It happens when expectations of future inflation rates are lower than they were when the debt contracts were made. This is clearly not an intuitive result. It means that when inflation expectations fall permanently, the value of existing debt rises – even if no new debt is incurred. We do not have to get to zero inflation to find ourselves in trouble.n how low inflation and deflation @Joseph Ryan You may indeed be right in your interpretation however I don’t see it that way otherwise as you correctly suggest the level of provisions would soar which could place every large bank in Europe under severe capital pressure. Hardly what the EBA really wants to achieve despite the tough talk. So the real answer is – only time will tell. That said the words ‘..classified as non performing..’ does not mean that the bank has to take the next step and provide for the potential loss. It merely means to note. The size, if any, of the provision as you correctly suggest, could be anything. Coming as I do from the accounting side of the world you can bet that the words will be interpreted in the most advantageous fashion for the bank so unless it specifically says that such loans need to be provided for at a particular provisioning percentage level then I’m not so sure that any provisions will happen at all. We’ll see. “Coming as I do from the accounting side of the world you can bet that the words will be interpreted in the most advantageous fashion for the bank so unless it specifically says that such loans need to be provided for at a particular provisioning percentage level then I’m not so sure that any provisions will happen at all. We’ll see.” I agree. I have seen so many of these things at work. What answer do we want ? Let’s work backwards. Why does the EBA review remind me of the Tesco Value range ? There is also some of the inanity about that Supervalu ad about it- “real food, real people”. Just do the thing and let’s see if it flies. http://www.ft.com/cms/s/0/9bfd1d18-7b39-11df-8935-00144feabdc0.html “First, investors can never ignore the herd. The price of equity and credit is set by fund managers. As investment has grown more institutionalised, so the critical number of investors has been reduced, and they become ever more susceptible to groupthink. Their greatest priority is to avoid doing anything that will cause their clients to pull their money out, as this is what determines how much they will be paid. Second, this is magnified by an innate problem we all have in dealing with situations where there is a small probability of a calamitous event. The financial industry as a whole showed this, in spades, in 2007 and 2008. Third, there is the issue of reputation. Once it has gone, you cannot get it back. Finally, the incident speaks to the ultimate utter uncertainty that is involved whenever we buy a stock. A company’s value lies in the cash flows it will generate in the future. This may be greatly affected by the assets it has built up in the present, but it still means that its value is in essence unknowable. ” So it’s really about herding the market and understanding sheep psychology. Is the EBA up to it ? Can anyone explain the key (but subtle?) differences between the old CT1 capital definition and the new CET1 definition bein undertaken as a result of BASLE III for the EU stress tests? Comments are closed.