EBA publishes common methodology and scenario for 2014 EU-banks stress test Post author By Philip Lane Post date April 29, 2014 here. Categories In Uncategorized 22 Comments on EBA publishes common methodology and scenario for 2014 EU-banks stress test ← International Financial Flows and Domestic Credit Conditions → Tax avoidance: The Irish inversion 22 replies on “EBA publishes common methodology and scenario for 2014 EU-banks stress test” 21.2%….well i never. Imagaine keeling over on the back of the 0.2% Deutsche Bank is getting ready for the fray. http://www.t-online.de/wirtschaft/unternehmen/id_69191820/deutsche-bank-schliesst-neue-kapitalerhoehung-nicht-aus.html Why bother? The stress tests will be gamed. Lehman’s were “Repo 105″ing the books for years to look all lovely on paper. http://online.wsj.com/news/articles/SB10001424052748703447104575118150651790066 How did that work out? The only way to ensure banks are sufficiently healthy is to declare that none will be saved if the SHTF – self-interest trumps state dictat every time. the sovereign bond haircuts look pretty interesting for Ireland and Cyprus The tests are based on a 3-year time period (2014-16) in which an adverse scenario is compared with a baseline. The latter assumes over 7% cumulative growth in the Irish economy, a fall in unemployment and a 19.5% cumulative rise in house prices. Consequently the adverse scenario initially looks very severe when compared with this baseline but GDP falls by just 1.5% from the 2013 level and the actual decline in house prices is 3%, with the unemployment rate at 14% by the end of the period. @ WGU You are right on the money, if one may be pardoned the expression. P.S. For those interested, to get around the WSJ paywall, cut and paste the article title to Google. Off topic but hot off the presses, the impact of US corporation tax policies o those of other countries. http://www.ft.com/intl/cms/s/0/d9b4fd34-ca3f-11e3-8a31-00144feabdc0.html#axzz301N69VbH Back on topic; UK http://www.theguardian.com/business/2014/apr/29/bank-of-england-subject-biggest-uk-banks-stress-test-house-prices-unemployment-interest-rates Sweden http://www.reuters.com/article/2014/04/29/sweden-banks-idUSL6N0NL61K20140429 One would have imagined that not having adopted the euro would have removed all concerns with regard to the health of one’s banks! Some of this adverse scenario stuff makes me very angry. EU unemployment to increase by approx 3% to 15%, in 2016 Bond yields to increase such that Italy and Spain at close to 6% in 2016. Equities to fall almost 20% by 2016. Very little or no change in EZ bond spreads under either scenario. So the banks are to be stress tested, in order to make Europe safe for bank investors (bonds and depositors), under the above adverse scenario. The capital for such investor protection, to be paid by out of the public purse, as little or no private unsecured or non-contingent funding will be available. What a massive fraud by the banking/financial/investor community on the public purse. The stress tests provide no benefit to ‘Joe’ public, yet he or she is to pay for it all. The only benefit to the European ‘Joe’ public is that an additional 3% of them will join the dole queues. I note from the comment by Dan McLaughlin that house prices are set to rise by 19.5% under the baseline scenario!!! And we wonder why house prices are increasing. Perhaps if Minister Noonan forced house prices up by 50%, through a curtailment of both credit and supply, all our troubles would be over. Perhaps if house prices Commentators have long noted that the EBA faced a difficult choice in calibrating this EU-wide stress test. If they implemented a strict and credible test they risked imposing politically costly capital demands on EU banks. On the other hand, if they implemented too weak a test they would further damage the already blemished reputation of EU banking sector stress tests and look like pointless clowns in the bargain. The choice has been made — pointless clowns it is! … banana time … On a general point, these were supposed to be used as a basis to require sufficient capital to be raised so that no further public bailouts would be required. Given that it appears deflation in the EZ is beyond reasonable consideration in this exercise, it is interesting to speculate about the effect on deposit bases and wholesale funding of some EZ banks should deflation, or some of the other boundaries be pushed. @docm “One would have imagined that not having adopted the euro would have removed all concerns with regard to the health of one’s banks!” Why is that? The UK had banks go bust and senior creditors take haircuts before the Euro even started. I don’t understand why several other countries cementing their DM pegs would be expected to prevent further UK bank failures. Stress tests are no longer meaningful in the US or EU, they are now characterised by moving goal posts. Here is an article on Ukraine by German intellectual Klaus Von Dohnanyi, well thought out from a German viewpoint. The German viewpoint is the one that matters. http://www.faz.net/aktuell/feuilleton/debatten/was-sie-in-die-knie-zwingt-klaus-von-dohnanyi-zur-ukraine-krise-12914417.html The Irish Times article on the Anglo share buyback quotes the judge as not using the usual get off scot free language wrt Neary and Horan of Regulator fame. I was under the impression that they played a passive invisible hand role. Now I know that even my darkest thoughts were not dark enough. It also confirms my perception that a man in a suit and tie with shiny shoes cannot be sentenced to jail in Ireland. @ grumpy I was making the point, indirectly and obviously not very well, that non-membership of the euro was, and remains, no protection from banking woes. @ Mickey Hickey The piece by von Dohnanyi is, or rather was, the standard SPD policy line with regard to Russia. The fact that the behaviour of the US is often as obnoxious as the Russian does not remove from the German electorate the need to choose i.e. between the EU – and NATO – version of European integration and the “balaclava” version of Putin. Or, put another way, a choice between Pax Americana and an unknown alternative. Merkel and the CDU generally are behaving on the basis that a majority of the German electorate prefer the former. The behaviour of a former German chancellor is probably confirming them in that preference. Not that there will not be strong opposition to sanctions to hurt domestic economic interests. But that is true of all EU countries. http://www.spiegel.de/international/germany/editorial-on-tasteless-relations-between-gerhard-schroeder-and-putin-a-966718.html I do not see a restriction claimer, so this Moody’s Analytics webinar ‘Prepare for EU Stress Tests – Best Practices for Regulatory Stress Testing & Capital Modeling’. attended by over 600 folks around the world, micht be of interest to some here http://info.moodys.com/961KCJ308000aFJ0018lY00 Ireland’s remarkable 12,000 buy to let mortgages over 2 years in arrears (tenants all defaulting on their rent in all cases, of course…, no landlords waiting for and stacking the deck for their rightful share of ‘debt forgiveness’, of course) still on way up… http://www.irishtimes.com/business/sectors/financial-services/most-buy-to-let-investors-in-arrears-on-trackers-study-finds-1.1777987 “More than two-thirds of long-term mortgage arrears in the buy-to-let sector stem from cheap tracker loans rather than high-cost variable-rate mortgages. The finding, contained in a study by the Central Bank, is likely to reignite concern that a significant portion of property investors are strategically defaulting on their mortgage loans in hope of gaining concessions from lenders. The study found that 70 per cent of mortgage arrears of 90 days or more in the buy-to-let sector – which equates to about €8.7 billion – were linked to cheaper tracker products, which are tied to European Central Bank interest rates. Since the financial crisis first hit, these rates have fallen from 4 per cent to an all-time low of 0.25 per cent, in theory making it a lot easier for tracker holders to service their debt. In addition, buy-to-let landlords, particularly in the urban areas of Dublin and Cork, have benefited from a recent upward shift in rents. The study – entitled Analysing Mortgage Arrears with Aggregated and Granular Data – found that in contrast to the buy-to-let sector, variable-rate holders, who have been hit by a sequence of rate rises, account for the lion’s share of arrears related to principal dwellings. Even though tracker mortgages, as a whole, outnumber variable-rate products, the latter accounted for 51 per cent of the long-term arrears total, and 64 per cent of account holders in long-term arrears. Willingness of banks The findings are likely to prompt questions about the willingness of banks to tackle mortgage arrears in the buy-to-let sector. The study, presented at a conference hosted by the Central Bank in Dublin yesterday, provides one of most detailed assessments of the mortgage arrears problem in the Republic. It showed that mortgage arrears of over 90 days jumped from 1.5 per cent back in 2006 to 19.6 per cent at the end of last year In contrast, for Spain, the EU country with the next highest level of arrears, the equivalent share was 7.5 per cent at the end of last year. The research indicated that while the growth in mortgage arrears stabilised at the end of last year, those in the longer-term arrears group, in excess of two years behind in their repayments, continues to grow.” Banks in many countries, both in the euro zone and elsewhere, seem to be highly skilled at taking dumb risks without provoking regulators. Even so, involvement in the euro zone seems to amplify this behaviour, both for banks in euro zone countries for which euro interest rates are inappropriately low and for banks in other locations looking for opportunities to make euro-denominated investments. @ Mickey, DOCM http://blogs.ft.com/the-world/2014/04/putins-partying-with-schroeder-highlights-german-and-russian-ties/ describes the statements of ALL former German chancellors actually pretty reasonably and http://www.welt.de/politik/ausland/article127370043/Das-Weisse-Haus-wundert-sich-ueber-Merkels-Plaene.html points out an actually pretty remarkable statement, the present Chancellor Merkel is making at the US visit this week. Her only public speech in the US will be at the Chamber of Commerce, the most influential internal enemy of Obama, which is probably the only thing we have in common with those guys : – ) Germany is waiting for what comes AFTER Obama. Our relations with the US & UK are based on specific treaties, and not on what some bullies in their media and governments think they can present to us as the available alternatives. @Mickey Hickey ‘… my perception that a man in a suit and tie with shiny shoes cannot be sentenced to jail in Ireland. Tut Tut Mickey – you’re slippin … This ain’t no perception; ’tis a fact! @Prudent Hans Angela should demand the resignation of ‘fu*k the EU’ Nuland and cancel her trip. Schroeder is an honourable man, it would have been easy for him to fade into the background. I think the shortest comment I ever read here, a while ago, was from some “otto”: “Germany must …. : – )” I believe this could be the same as the “Bernhard otto”, who makes repeatedly pretty intelligent and insightful comments in the FT, like in “Germany must stop trying to be the Kremlin’s special ally” http://www.ft.com/intl/cms/s/0/b4b9c71e-cf8d-11e3-9b2b-00144feabdc0.html?siteedition=intl#axzz30MQPujAY I don’t think we are overly sensitive, when we are irritated by this constant „Germany must“ attitude so many in the US & UK have. They have to learn to convince people and not dictate to them, which is of course difficult if they are constantly caught lying, like Colin Powell at the UN. And so far “I am not convinced” that the US politics in Libya, Syria, Ukraine is doing any good, but “A Foreign Policy Flirting With Chaos” http://online.wsj.com/news/articles/SB10001424052702303380004579524253845751062 Comments are closed.