SocGen On The Stress Test: "It Does Not Reflect Reality" And "A Political Error Can Trigger A Freeze In Money Markets"

Tyler Durden's picture

And we thought we were harsh on the EBA's second farce of so-called 'stress tests'. Enter SocGen's Hank Calenti and team: "The test does not reflect current reality, in our view; even if GIIPS sovereign are further stressed within this test, a €22bn shortfall and a relatively healthy average 6.2% core Tier 1 appear. The European banking sector is captive to politics at the moment. A political error can trigger a freeze in money markets, and a liquidity crisis could quickly turn into a solvency crisis. Only improved governance would avoid such a nasty scenario." We wonder what Calenti would say about the US in this case...

Some other disclosures from the "test" Europe wishes could forget had ever been conducted (at least until Stress Test 3 next summer... or this winter).

The EBA was effectively in a lose-lose situation: too few failures and the test is branded too lenient; too many failures and some will worry that the system is in worse shape than they had expected.

The stress tests confirmed two already well know results. First, the bulk of exposure to the weakest sovereigns is held by the domestic banks (in both absolute and relative terms). Taking the example of Greece, of the total exposures to the Greek sovereign reported for the 90 banks taking part in the stress tests almost 60% is held by Greek banks. Second, exposure of non-domestic banks to, respectively, Greek, Irish, Portuguese and Spanish sovereign risk is relatively moderate.

The tests will inevitably be criticised for such a small number of failing banks (eight) with an aggregate capital shortfall of just €2.5bn, and the fact that sovereign default is not considered. By including the possibility of sovereign default across multiple jurisdictions (haircut of 50% for GIP sovereigns, 20% for Italy/Spain), our analysis suggests 13 banks of a sub-set of 40 of the larger, quoted banks could fail, with an aggregate capital shortfall of €22bn. The average core Tier 1 capital would remain at a still relatively healthy 6.2%.

Like the equity market, credit market reaction to the stress tests is also likely to be relatively muted in our view, with few easily decipherable surprises discovered within a large volume of disclosures. We do not envision a flood of new bank debt issuance in the short term for two reasons. It may be more advantageous to de-lever than raise funds in the international capital markets. This would clearly have attending feedback into the bank-to-sovereigns and economy causality.

Unfortunately, there is no discussion of the WSJ's earlier disclosure of the critical several trillion in PIIGS C&I loan exposure. In retrospect, perhaps it makes sense it was omitted.

As for how to trade this data, the following chart of CDS vs Tier 1 Capital (and we certainly do not vouch for the credibility of the Tier 1 data) may be the best tearsheet of who is relatively cheap in terms of risk, and who is rich.

Full report:


Comment viewing options

Select your preferred way to display the comments and click "Save settings" to activate your changes.
sitenine's picture

A political error can trigger a freeze in money markets.

Is that something like a shortage of hopium?  Seriously - WTF?!

Ahmeexnal's picture

AU 1600. AG back at 40.

Game Over.

Flounder's picture

USDJPY 78.964...?  Anyone awake out there?...'specially at the BoJ.  Don't they normally vomit and intervene below 80?  Or is Typhoon Fukushima wagging the dog?


Bang Dae Ho's picture

I just realized that USDJPY has been on a constant downwards trend since July 07 and this trend will stay 'intact' up to 94,76...

Subprime JD's picture

even if GIIPS sovereign are further stressed within this test


Look at Soc Gen being all PC by called the PIIGS the GIIPS lol like it makes a difference.

Libertarian777's picture

I guess a stress test is a forward looking version of GIPS? With no biases right? Lol

Bang Dae Ho's picture

GIIPS is something different than PIIGS!!






TheFourthStooge-ing's picture

Look at Soc Gen being all PC by called the PIIGS the GIIPS lol like it makes a difference.

All they need to do to increase confidence in the euro is call them iPigs.


Zero Govt's picture

I'm not sure Soc-Gen flipping PIIGS to GIIPS is being 'PC' ...more like continued evidence of rose tinted spectacles trying to dress these piigs with lipstick

...the application of lush French cosmetics won't make one iota of difference anyway, the Butcher's on his way

monopoly's picture

I am sure glad that we do not have to worry about our banks, liquidity and bad mojo. And they still eat out, buy Ipads, look at cars and increase their debt on 18% credit cards.

Just nothing else to say.


Good night Tyler and all. Manana.

chump666's picture


They more they con the market the bigger the liquidity crunch.  French banks must be sweating it, as are German banks.  The whole Greek thing was a flop from day 1 of their 'bailout' BS.  Greece already partially defaulted, now a full default/restructuring.  Lock it in!  Probably very close.  europe zone will be a shortsell fest...and the white knight?  Forget it, their black money grey money property wipe out is around the corner.

PaperBugsBurn's picture

Amazing how these bitches are like,"oh, my bankster juden-fetzen is better than yours".

True monkey slaves.

Oh regional Indian's picture

Hey, now that bank stress tests have been proven meaningless, it's time to shift our focus to the Nuke Plant stress tests globally.

Of course, unlike banks, we all know that nuclear plants are ALL TBTF! ;-)

COmforting thought, hmmmmm?


High Plains Drifter's picture

the silence from the midwest united states these days is deafening.......not a word is heard all of a sudden about the flooding problems. also the large fires in new mexico , burned off much needed underbrush, to prevent erosion in the canyons around los alamos. that dirt in those canyons is not something anyone wants to mess with believe they are working now to try and prevent any possible problems there about this when heavy rains come and they will come again, one day.......what they want and want real bad, is for as much of that dirt in those canyons to stay in those canyons for the forseeable future due to half life issues......

Lndmvr's picture

Re: The flooding,  It has become a waiting game. The biggest problem I see is the bridges. Still waiting for a house or camper or something to hit 1 after the bases of the sipports are washed out. The flooded land will be a toxic waste dump when it drys. They won't be able to put the dirt back where they got it for the levees. Deer are migrating and will become traffic hazards in fall. From Iowa.

ml8ml8's picture

What I'd like to know is this:  if the U.S. debt talks collapse next week and a sell-off begins in the Treasury markets, where does the "safe money" go?  Presumably, it is not into European soveign bonds or European bank bonds. 

HungrySeagull's picture

Gold and Silver with Physical Delivery.

Bang Dae Ho's picture

unfortunately no relieving default will happen. (Central)banks want to issue more and more debt. It is their business model: To steal wealth from the future = to destroy the middle class, to destroy all hopes for a better world. A default and eventually a system crash would end the party. They can and will avoid that.

slewie the pi-rat's picture

We do not envision a flood of new bank debt issuance in the short term for two reasons...

[the morgue floated $1.5 Bil last week.  what will blythe want to do with her share?]

"...Only improved governance would avoid such a nasty scenario."   from the people in charge?  this does look grim.  let's start some prayer chains or something, quick!

Helena Bonham-Carter's picture

If they say ay, it will; if they say no, it will; if they shake their tail and say nothing, it will.

slewie the pi-rat's picture

The conclusion is then that...

                      ...we are laughing? 

cranky-old-geezer's picture

Default alarms going off all over the world now.  Far worse than '08.  It's nations now, including America.

Is the worldwide debt ponzi about to unwind?

chump666's picture

...that an oil is bid. Looks like the geopolitical tension scale just went up. 

Edward Fiatski's picture

Where sovereign defaults are mentioned, a world war soon follows. A WW in fact, is the only thing able to save this global economy from the billions of unemployed, landless peasants. :-)

IMO the EUR is being used to milk what little sovereignty is left in the peripheral states (PIIGS). Ireland was the EU's target for its resistance to the European Consitution (Treaty of Lisbon), while Iceland was let off the hook when people showed the banks that they do have balls. The itanimulli respect those who can find dignity and take a stand for the truth, and truth being in Iceland's case: it's not their debt and they rightfully defaulted on it.

Bang Dae Ho's picture

Dear contributors, all that sarcasm, rant and pessimism leads to nothing. We should be positive and act. I make a start. I write an E-Mail to my local representative with my idea how to improve the financial sector and how to make the stress tests more effective. It is simple and actionable: I would let design a stress test for stress tests. I would feel much safer then.

TheFourthStooge-ing's picture

I write an E-Mail to my local representative with my idea how to improve the financial sector and how to make the stress tests more effective.

"Dear Representative Fuccemal,

I recommend the following legislation to improve the financial sector. The bankers should be hanged as a part of the stress test. If they survive, they are honest and their bank is well capitalized. Please then apply this to politicians as a corruption test. The survivors are trustworthy. Thank you."