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The European Stress test results are coming.. | Advantage zyaada

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Sneak previews suggest that banks might easily fail the coming stress tests even as Chinese Banks CDS rises in the markets ahead of all the speculation on local government default. While sovereigns may default anyway and the run on greek banks has already cost 8% of the inter bank liquidity , Greece may yet pass austerity measures in time and get on but banks will continue to face the pressure, many including us still looking at a big Lehman event in Europe as takers for Euro muzzle their nose on the looking glass.

Also, from the Greek scenario, whether the bailout gets through or not any change in terms is likely to be flagged by Fitch as a Default and a lot of push would be required to stop the run on Greece/Europe thence

From the stress tests results coming this/next week (if on time):

– Bank capital definitions still not cleared to make it probably easier for CoCos that change into equity on default event from the Swiss and other European governments and thus murkying the waters for Fitch and Moody’s who do not count them in Capital

– A further run on the Greek banks and hoarding of old currency cash may work against the citizens and unlikely that such a scenario is being tested

– News from Reuters suggests that 1 in 6 European banks will be shown as failing in the lastest results , which do not include a run on cash but include a 15% lower stock valuation and a 75 basis point higher long term soverign yield and a 1.5 % higher short term yield. Current increases in yield in the German Bunds itself would cross more than 100 basis points and in peripherals go up to 1000 basis points in Greece and 200 basis points in Spain and Portugal

Here is a summary note on the parameters for bank defaults under scrutiny by the European Banks Association. Independent bodies also exist for Securities Markets and insurance Companies ( ESMA and EIOPTA) and each includes  arep each from 27 member states (of which 25 could be looking for a dole) The lady governors at these organisations may also look to Christine Lagarde joining them tonight at the IMF

Those European stress test details

Posted by Tracy Alloway on Mar 18 08:35.

In case you forgot that other crisis…

The European Banking Authority has just published parameters for the upcoming European bank stress tests. A first glance has them about as meek as expected.

Major points and assumptions below:

  • The exercise will be carried out using banks’ year-end 2010 figures.
  • No workout of defaulted assets is assumed in the exercise, therefore banks’ portfolios will stay constant. Apparently some banks don’t like this aspect. It does mean that their balance sheets will shrink due to impairments.
  • The banks themselves are expected to estimate the effect of key macro-economic variables of the scenarios – including GDP, unemployment, interest rates and property prices – on their balance sheet. Those scenarios are here.
  • Funding needs of the banks are considered stable during the time horizon of the exercise and no change in funding structure is permitted in the exercise.
  • In the baseline scenario all direct and indirect sovereign exposures in the trading book will be subject to a general “interest rate” stress, representing an upward movement in the swap curve. This general interest rate stress will affect non-sovereign exposures the same way as sovereign exposures.
  • And under the adverse scenario, direct eurozone sovereign exposures in banks’trading books will be subject to further valuation shock based on specific sovereign rate shocks. The shock isn’t much different to what’s already been leaked to the media though — European stock prices are assumed to be 15 per cent lower, the US dollar to be 11 per cent weaker against major currencies, short-term interest rates to be higher by 125 basis points and long-term eurozone sovereign bond yields to be higher on average 75 basis points.
  • Banks will also be expected to disclose their exposures to sovereigns, broken down by accounting portfolios (AFS, HTM, HFT), maturities and countries.
  • Bizarrely, there’s no definition of what qualifies as capital (a criticism of the last stress test) yet. Apparently, the “exact definition of capital and the threshold set up for the purposes of the exercise” will be provided at a later date.

The full 51-page methodology is available here.


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