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.