This page has been archived and commenting is disabled.

Revisiting The Grand Farcade: A Visual Guide To Round Two Of The European Stress Test

Tyler Durden's picture




 

It is no secret that everyone who manages money looks at each and every iteration of the European (or US) stress tests as nothing but a glorified farce, attempting to restore systemic credibility, yet which ultimately always end up hurting it. That the first European stress test identified exactly zero of the banks that failed within months in Ireland is also no secret. However, with Europe once again out of options, here comes stress test round two. For those who care about this grande farcade (sic), here is a simple visual summary. We fully intend to recreate this post some time in March 2012, describing what Stress Test round 3 will look like.

From the London Stock Exchange:

Even before the European Banking Authority (EBA) starts its new round of bank stress tests, the same criticisms that dogged the first round have been raised again – not tough enough, measuring the wrong things, just too woolly generally.

Not so, say EU officials. This time around the test will not be of “liquidity but of solidity,” European Central Bank council member Yves Mersch said in response to the already mounting criticism. The tests will be “more severe” than the previous ones and “I hope that the markets will accept that this stress test is a serious one,” he said.

The fact is it will be almost impossible for them to be less severe than the last tests. Only seven lenders in the whole eurozone failed last time and regulators estimated only €3.5bn of new capital was required to rebuild the banks’ balance sheets.

All of Ireland’s banks passed the test, but just four months later the country’s entire banking system collapsed prompting an €85bn bail-out for the whole country, of which €35bn went directly to the banks.
...
It’s a tall ask after last time’s debacle, but the EBA says that it has incorporated the lessons from last year. The next series will cover more than 65% of the EU banking system’s total assets, with tests on a bank-by-bank basis.

The test will assess the solvency of an individual institution.  The capital threshold will be focused on a definition of core tier 1 capital, reserves and equity, which is more restrictive than the tier 1 threshold used in tests last year.

The baseline macro-economic scenario is based on the Autumn 2010 eurozone forecast. This includes forecast EU growth of 1.7% in 2010-11 and 2% in 2011-12 and a gradual increase in short-term interest rates to 1.5% in 2011 and 1.8% in 2012.

The tests include a "marked deterioration" in the forecasts for GDP, which the EBA assumes will fall four percentage points from the baseline compared to three in the 2010 exercise. The tests include a fall in share prices of between 10% and 20%, an 11% fall in the dollar's value and short term interest rates to be raised by 1.25 percentage points.

This adverse economic scenario is tougher than in 2010 and deviates more from the baseline scenario than last year. The stress tests will be carried out between March and June and the initial results will be submitted to the relevant national authorities. The results will be analysed and assessed before published later in June 2011.

Some analysts believe that the adverse scenario is still not tough enough. If this proves to be the case, it may be a very long time before the exercise is tried again.

 

- advertisements -

Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
Mon, 03/28/2011 - 13:57 | 1109457 RobotTrader
RobotTrader's picture

I'm watching the "worst of the worst" big banks in Europe, like STD, BBVA, HBC, and they are barely selling off on this intraday correction.

Maybe tomorrow, who knows?

Right now all the banks, including The JP Morgue and Wells Fargo are hardly budging.

They need to enter the crash window ASAP.

Mon, 03/28/2011 - 14:20 | 1109548 carbonmutant
carbonmutant's picture

BAC does seem to be exhibiting some sensitivity to the issue...

Mon, 03/28/2011 - 14:08 | 1109503 CitizenPete
CitizenPete's picture

Money flow is going where, while this shoe is being pulled off by the suction of the mud?

Mon, 03/28/2011 - 14:22 | 1109558 Oh regional Indian
Oh regional Indian's picture

Into the deep black-hole that is the fictional, rotten foundation of the global financial system.

it's the giant sucking sound that starting to sound like a Category 5 hurricane.

Bottomless pits, it's where it's headed.

ORI

http://aadivaahan.wordpress.com/2011/03/28/for-dis-believers/

Mon, 03/28/2011 - 14:40 | 1109646 EvlTheCat
EvlTheCat's picture

FYI, ORI, Hurricanes do not produce a sucking sound.  May I suggest a Uzumaki whirlpool instead?

http://www.youtube.com/watch?v=sU8zyscGWe4&feature=player_embedded

Mon, 03/28/2011 - 15:14 | 1109751 Oh regional Indian
Oh regional Indian's picture

Indeed Evl, you are right, they produce great roaring sounds.

The Uzumaki Whirlpool, indeed. Very fitting too. And Holy Godzilla while we are at it. Thatnks for the link. Nature....wow!

ORI

Mon, 03/28/2011 - 14:10 | 1109508 tahoebumsmith
tahoebumsmith's picture

This time around the test will not be of “liquidity but of solidity.... Does this mean you will include...Mark to Market values? Derivitives exposure? Worthless CDO'S? Toxic MBS? Shadow inventory? current rate of delinquencies? Back door loans? Off balance sheet debt?

I didn't think so because if you did, we all know the Banking meltdown would dwarf the nuclear meltdown in Japan.

Mon, 03/28/2011 - 14:12 | 1109524 Highrev
Highrev's picture

What's farcical is the time line.

(Unless it's one guy going around with an abacus.)

 

 

Mon, 03/28/2011 - 14:14 | 1109526 Sudden Debt
Sudden Debt's picture

Fortis banks went under and was bought by BNP.

I was a very large Belgium bank.

 

Mon, 03/28/2011 - 14:48 | 1109666 koeleköpke
koeleköpke's picture

sorry, it was given away by master leterme.

 

Mon, 03/28/2011 - 14:16 | 1109535 carbonmutant
carbonmutant's picture

This is an attempt to whitewash the last whitewash...

Since the banks that are currently failing weren't detected by the first test...

Mon, 03/28/2011 - 21:26 | 1111095 Zero Govt
Zero Govt's picture

all the European banks are bankrupt if their interconnections imploding were accurately accounted for (fat chance!)... better to think of this as 'Shining Turds: Round 2'

Mon, 03/28/2011 - 14:16 | 1109538 Cdad
Cdad's picture

every iteration of the European (or US) stress tests as nothing but a glorified farce, attempting to restore systemic credibility, yet which ultimately always end up hurting it.

Correct.  We are in the final phase now, I suspect.  I am not sure how long it will run, but clearly we are now in the phase of collapse where all credibility will be lost.  The banks will be the deliverers, mind you.

The equity market has lost its credibility already.  Property is in the second leg of failure.  Bonds will be next based on our failed Federal government.  Laws have begun their failure, and that will accelerate when the government can no longer pay off its critics.  Our Republic lurches towards its judgement day.  Saving it will require great courage and sacrifice...of which none can currently be seen in any direction...a nation full of navel gazers and whiners.

That smell on the breeze is death...the rotting of all the things Washington DC and Wall Street have destroyed in their  greed.  Our fate awaits us.  These things...these markets...mean nothing now.

Mon, 03/28/2011 - 14:21 | 1109563 Yield2Greatness
Yield2Greatness's picture

Nobody cares about these test, except the banks who are trying to deceive there "friends".

The Euro is falling one domino at a time.  Only those with their heads in the sand will lose out.

Mon, 03/28/2011 - 14:33 | 1109591 Oh regional Indian
Oh regional Indian's picture

The EU had a purpose. Suck more resources into NATO Bank. Capital fodder, human fodder, the works.

That work is near complete. Very easy to draft fighters in poor economic times.

Now they can let it dis-integrate under the weight of it's own false-hoods.

FOFA's great argument of mark to market gold is good for the Bankers (ECB especially). And we all know that what is good for the bank is really really bad for the average Joe/Joan. In a war secanerio as we see unfolding, it's all quite clear really. Stress tests of banks. Too ironic and not really funny anymore.

ORI

http://aadivaahan.wordpress.com/2011/03/28/for-dis-believers/

Mon, 03/28/2011 - 14:36 | 1109631 fearsomepirate
fearsomepirate's picture

Here's my stress test:

Do you have less than 100% reserves backing your demand deposits?

[ ] Yes

[ ] No

Mon, 03/28/2011 - 14:56 | 1109689 metastar
metastar's picture

I might add "GOLD/SILVER" reserves to your question.

This is the only real stress test that counts.

Mon, 03/28/2011 - 14:37 | 1109636 a1sinclair@aol.com
a1sinclair@aol.com's picture

The number one thing they need to do is mark all of their bonds to market. If they only mark their trading portfolios and not their investment portfolios then there is no provision for rescheduling or what the market currently thinks about the risks of various countries.  The market is the best judge of value and if the banks think they can just sit on these portfolios until they have dropped 50% or more; they will all be broke.  Rescheduling will occur and the market knows that today.  There are other risks on their books but this is the biggest one and it should be fully disclosed.

Mon, 03/28/2011 - 15:14 | 1109754 The Disappointed
The Disappointed's picture

Is that you Jim?

Mon, 03/28/2011 - 15:03 | 1109712 buzzsaw99
buzzsaw99's picture

more stress test = more free monopoly money

Mon, 03/28/2011 - 15:32 | 1109806 ebworthen
ebworthen's picture

Jump test = How high can you jump?  2 feet?  O.K., jump this 3" curb.

Limbo test = How low can you go?  3 feet?  O.K., limbo under this goal post.

WOW!  You are an athelete! 

 

Mon, 03/28/2011 - 15:59 | 1109904 Cognitive Dissonance
Cognitive Dissonance's picture

My (government teat) mother will be so proud of me.

Mon, 03/28/2011 - 15:53 | 1109886 irishlink
irishlink's picture

at the end of this crisis, some banks have to survive. Trying very hard to avoid the duds, but its akin to walking a mine field. Globalisation has skewed everything.

Mon, 03/28/2011 - 18:51 | 1110547 Rainman
Rainman's picture

Marking on a curve in high school meant the lazy dumbshits in class were working a handicapped score. It helped to get the hopeless out the door.

Mon, 03/28/2011 - 20:30 | 1110891 PulauHantu29
PulauHantu29's picture

Better put on the Anit-BS Uniform.  These "stress tests" are so demanding......it's like my cardiologist giving me a heart stress test by asking me to walk across the room.

A joke!

Do NOT follow this link or you will be banned from the site!