Anti-gloom on the stress tests

While having to put another €24 billion into the banks is hard to stomach, I am still surprised by the overwhelming negativity in the reaction to the release of the stress test results.    I think there were three big questions going into yesterday:  

(1)  Would we get the information necessary to reduce the large range of uncertainty about ultimate banks losses that has been weighing so heavily on the creditworthiness of both the banks and the state?  The detailed information on bank balance sheets and projection assumptions used allows anyone interested to reengineer the calculations as necessary, and is a step change from the kind of information analysts were working with before.   The bank balance sheets and loan loss projections are now far less of a black box. 

(2)  Would the banks end up sufficiently well-capitalised to overcome the difficult funding environment?   By my calculations, allowing for the capital buffers, Core Tier 1 is close to 10 percent under the stress scenario and close to 17 percent under the base scenario.   [Note that the stress scenario is binding for all four tested banks this time round; see Table 16]   We will have very well capitalised banks. 

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April Fools One Year Ago

Given the day that’s in it, I was contemplating whether to do a funny story. But then I remembered the Irish Independent’s entry in the April Fool’s stakes from last year and figured I couldn’t beat it.

Brendan Keenan interviewing Brian Lenihan:

“With the banks playing for time, and the regulatory system discredited, we needed to establish an asset-relief programme like NAMA. That takes time to put into practice. It can’t be done overnight.”

He makes a point that tends to be overlooked in discussions of whether more should have been done sooner. It could not have been done 12 months ago, with the financial markets fretting over the scale of the budget deficit.

The country came close to not being able to borrow the money to keep it running. Attempting to cover the bank losses as well might have made that danger a reality.

At the time, however, I didn’t find it that funny.

Michael Noonan in the FT

Michael Noonan has an article in the FT. There’s no mention of bondholders or new ECB facilities. We do get this, however:

We will, of course, repay our debts but we must ensure that the debt is sustainable and not such a burden that it could cripple the economy for generations.

The EU has helped make Ireland the business-friendly, entrepreneurial country it is today and the solidarity shown recently through liquidity support from the Eurosystem, the ECB and through the Europe Financial Stability Mechanism, the European Financial Stability Facility and bilateral loans is greatly appreciated. It is in everyone’s interest that this support be repaid by the banks and we can ensure that that happens by pursuing policies that foster growth and boost market confidence.

Message: Ireland ♥ Europe and don’t worry about all that money we owe ye.

Irish Times Needs Better Sources

Prior to today’s announcements, the Irish Times were flagging the following:

Mr Noonan will make a “watershed” argument for a EU-wide solution around passing bank losses on to bondholders in response to the tests on Bank of Ireland, AIB, Irish Life and Permanent and EBS building society. Government colleagues last night described it as the first radical policy departure from the previous Fianna Fail-led government.

A few months ago, just prior to the announcement of the EU-IMF agreement, the Times had reported:

The source said there was a “common understanding” between delegations from the EU Commission, the European Central Bank and the IMF that senior and junior bondholders should each pay a share of the rescue costs.

Two conclusions to draw from this. First, people shouldn’t pay much attention to the Irish Times reports on these matters. Second, the Times need better sources.

Anglo 2010 Annual Report

Oh, and by the way, Anglo Irish Bank released their annual report for 2010 today. Apparently, they lost €17.7 billion. Don’t worry though, it’s manageable.