Here Are The 26 Banks Moody's Expects To Fail The Second European Stress Test

Not like it matters much, because any bank that is found to be insolvent following the second consecutive European stress test will merely receive more taxpayer funds concealed as an SPV or a CDO or some other "complex" instrument, but for what it's worth Moody's has released a list of banks that it believes will either fail the farce, pardon, test outright, or will be "candidates for additional support going forward." As a reminder, the European Banking Authority (EBA) is about to publish the results of an EU-wide stress test involving 91 banks from 21 countries. The purpose of this exercise was to assess banks’ resilience to adverse external circumstances and to identify vulnerable banks, defined by EBA as banks whose Core Tier 1 (CT1) ratio falls below 5% under at least one of the scenarios included in the stress test. Moody's splits the sample into 4 Groups as follows: Group 1 : investment grade banks (at or above D+/Baa3 ) : 54 banks, Group 2 : non investment grade banks from peripheral countries (Ireland, Greece, Portugal, Spain) : 17 banks, Group 3 : non investment grade banks from other countries (Germany, Slovenia, Hungary, Austria, Cyprus) : 9 banks, and Group 4 : unrated: 11 banks. It is Groups 2 and 3 that are the focus of the analysis and which will be benchmarked against the test to determine credibility. As for the fact that all European banks are insolvent if just one is, just as all of Europe is bankrupt if Greece were to go under, that's a completely separate point.

From Moody's:

Banks from group 1 (see Appendix 2 and 3) are best able to absorb shocks. Any such banks which fail the test would very likely be downgraded in short order.

Banks from Group 2 (see Appendix 2 and 3) can be broken down into 2 sub-groups:

  • Sub group 1: banks from Greece (5), Ireland (3), Portugal (3) which have already received a great deal of external support. This assistance has been extended either in the form of capital injections – from shareholders or from governments – or in the form of funding obtained through government support mechanisms (e.g. guaranteed debt) or from the ECB.
  • Sub group 2 : Banks from Spain (6 banks). We recently published a Special Comment (Moody’s Estimates of Spanish Banks’ Capital Positions – Rationale, Results and Sensitivity Analysis – June 14, 2011) in which we estimated that, given existing capital shortfalls and loss mitigants (i.e.charge-offs, reserves, stressed one-year earnings and excess capital) and assuming stricter capital requirements published by the Bank of Spain in February 2011, the overall capital shortfall for Spanish banks amounts to approximately €45 billion in the base-case and to approximately €119 billion in a stressed scenario.
  • Both sub-groups are inherently weak and are candidates for additional support going forward.

Banks from Group 3 (see Appendix 2 and 3) : banks from Austria (1), Cyprus (2 ) , Germany (4) ; Slovenia( 2). The four German banks (West LB, HRE, HSH, Bayrische Landesbank) are undergoing major restructuring with public assistance. In contrast the Cypriot banks (Bank Of Cyprus Public Company Limited, Marfin Popular Bank Public Company Ltd) have large exposures to Greece, which makes capital buffers vulnerable to a potential Greek sovereign default in particular if the loss given default were significant.

Banks from Group 4 : unrated banks (11) mostly from Spain (9).

The full list of Group 2 and 3 banks. We urge any readers with money in these banks to pull their cash yesterday.

That said, as Moody's makes it all too clear: 'Liquidity risk: not assessed as part of this exercise; EBA indicated that “the liquidity profile of relevant institutions is being assessed by a specific thematic review, which is for supervisory purposes” (not to be made public)." In essence, the one most important component of bank viability will not be tested for at all. And these bureaucrats expect to be taken seriously.