MSM Newsbytes on European Banks, Adjusted for Factual Analysis, This 14th Day of July, 2010

I have been sounding the alarm on the Spanish banking system since January of 2009, and the Italian banks since the first quarter of this year. Now, the MSM is starting to catch up. For those who have not been reading my recent European work, I offer you The Pan-European Sovereign Debt Crisis series, for all others – read on…

From CNBC: Eleven Banks Will Fail EU Stress Tests: Strategist

Eleven banks including Germany’s Commerzbank and Italy’s Banco Popolare will fail the European Union’s stress tests, Alessandro Roccati, director at Macquarie Securities, told CNBC Wednesday.

“We identify a handful of banks which would need more capital in a base case stress scenario; these are: all Greek banks, Bankinter, Postbank, Banco Popolare, BCP, Commerzbank and Sabadell,” a report from Macquarie Securities said.

If BoomBustBlog subscribers recall, we had a very similar (if not significantly more extensive) list in our 1st quarter warning of banks exposed to the sovereign debt crisis (click here to subscribe).

Back to the article…

Even though the number of banks likely to fail the test is relatively small, it may not allay fears on the health of the overall European banking sector, the note said. Of the 46 listed banks being tested by the EU, only eleven will have insufficient capital, but of the total 91 banks, including non-listed banks, the number will be greater, Roccati said. “The key concern and the key differentiating factor is actually the cost of credit and not the decrease in revenues due to a slowdown of the economy,” he said. European banks may need a minimum of 6 percent tier-1 capital ratio in order to pass the stress tests, according to a Dow Jones report Wednesday. Roccati pointed out that the current regulations require a 4 percent tier-1 capital ratio.

Banks that do fail the stress tests may have some breathing space in which to raise capital as they are unlikely to need to issue debt in the very short term, according to Roccati. If the troubled banks can’t recapitalized themselves or be funded by their sovereign governments, it will fall to the EU’s central backstop fund to bail them out, he said. Given the concerns over the sector, Macquarie said he favors BNP Paribas, UBS, SEB, DnB NOR, Nordea, and Erste Bank. Macquarie recommended caution on Iberian and Greek banks.

Here is an excerpt from the subscription download: File Icon Italian Banking Macro-Fundamental Discussion Note where similar banks are mentioned…

Also from CNBC.com: Spain Banks’ ECB Borrowing Surges to Record High

Borrowing by Spanish banks from the European Central Bank surged in June to a new record high, indicating tight access to funding before the expiry of 442 billion euros in one-year ECB loans at the start of July.

Data from the Spanish central bank showed banks borrowed 136.49 billion euros from the ECB in June, a jump from the 105.6 billion euros in May. Subtracting the amount banks redeposited at the ECB, the total borrowed was 126.3 billion, a quarter of the overall amount lent by the ECB

Considering Spanish lending is a much, much smaller minority than that, it should tell us in no uncertain terms that those financial Spaniards have some unresolved issues!!!]

That figure was up from 85.6 billion euros in May. “It does appear that Spanish banks have increased their reliance on ECB funding even further in June,” said Nick Matthews, economist at RBS. “It’s probably down to two reasons. One, banks may have taken more precautions before the repayment of 442 billion euros at the start of July, and  two, because of more funding difficulties,” he added. Borrowing from Spanish financial institutions from the ECB leaped in May from just over 90 billion for the first four months of the year as interbank money markets froze and domestic banks turned to Europe’s central bank for financing. Smaller banks in Spain lost access to interbank markets in late May heading into June over concerns that Spain could be the next country to face a debt crisis similar to that of Greece, where banks are heavily dependent on ECB financing.

For subscribers, we have modeled the Spanish government finances to ascertain realistic deficit and debt levels:

File Icon Spain public finances projections_033010

Keep in mind that Spanish banks hold a lot of Spanish government debt as well as overvalued real estate loans. Subscribers should also download:
File Icon Spanish Banking Macro Discussion Note

File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – retail.pdf

File Icon A Review of the Spanish Banks from a Sovereign Risk Perspective – professional