As was leaked on Friday, when the market surged on news that some 25 banks would fail the ECB's third stress test (because in the New Normal more bank failures means more bailouts, means the richer get richest, means more wealth inequality), so moments ago the ECB reported that, indeed, some 25 banks failed the European Central Bank's third attempt at collective confidence building and redrawing of a reality in which there is about €1 trillion in European NPLs, also known as the stress test.
The ECB's results as summarized by the central bank:
- Capital shortfall of €25 billion detected at 25 participant banks
- Banks’ asset values need to be adjusted by €48 billion, €37 billion of which did not generate capital shortfall
- Shortfall of €25 billion and asset value adjustment of €37 billion implies overall impact of €62 billion on banks
- Additional €136 billion found in non-performing exposures
- Adverse stress scenario would deplete banks’ capital by €263 billion, reducing median CET1 ratio by 4 percentage points from 12.4% to 8.3%
Goldman's quick take:
- AQR: 16 banks fail (87% pass rate); €5 bn shortfall identified (€36 mn post mitigations).
- Test: 24 banks fail (80% pass rate); €25 bn shortfall identified(€9 bn post mitigations).
- Not all banks failing the AQR/Test overlap: Cumulatively, therefore, the two exercises yield a capital shortfall of €25 bn needing to be addressed by 25 banks. Mitigating actions result in the figures falling to €9 bn and 13 banks.
- Pass rate lower, shortfall below expectation: The number of failing banks exceeds investors’ expectations as gauged by our market survey (“Survey”); the capital shortfall looks lower.
- Failing banks: 25 vs. 8 (middle point of the expectation), for an 81% pass rate.
- Capital shortfall: €25 bn pre- and €9 bn post mitigations vs. €38-51 bn expected range.
The important part being that not even Goldman is buying the reported negligible capital shortfall.
The central bank's punchline: "[the] Exercise delivers high level of transparency, consistency and equal treatment. Rigorous exercise is milestone for the Single Supervisory Mechanism starting in November."
And this is what it's all about from Vítor Constâncio, Vice-President of the ECB. "This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth." Or, as Bloomberg called it, "The ECB has staked its reputation on Monday's stress test results"... what reputation?
As for the 25 bank failures in question, they are shown below, with failures concentrated among Italian banks, with nine banks unable to "pass", and Greek and Cypriot banks, with three apiece. Among the largest is Banca Monte dei Paschi di Siena, Italy’s third-largest lender, which faces an outstanding capital hole of about €2.1 billion. While the ECB would have loved to have Monte Paschi pass, the bank has been far too many times near death to credibly squeak by on whatever "reality-bending" terms.
Amusingly, some 18 months after the entire Cypriot financial system collapsed and the country's banks had to be bailed in, the Bank of Cyprus which failed the test as per the above, said it passes ECB stress test assessment following its EU1b share capital increase.
"The positive result of the Comprehensive Assessment reaffirms the solid capital position of the Bank, even under the most extreme, severe theoretical stress conditions. It also reflects the pro-activeness of the Group in raising adequate capital in advance of the Comprehensive Assessment”: Dr Christis Hassapis, BOC Chairman says in statement.
Remember: confidence... confidence.... confidence...
Some quick observations: not a single major bank failed the stress test and the cumulative capital shortfall among the 25 failures is precisely €25 billion, less than the €27 billion shortfall reported during the 2011 stress test when 20 banks failed, and when Banco Espirito Santo, Dexia and Bankia all passed with flying colors. Oh, and just in case it was lost the first time, the Bank of Cyprus supposedly passed.
According to the WSJ, the number of failures, and the depth of the cumulative capital shortfall, was slightly larger than what analysts and investors expected European regulators to identify during their “stress tests” of 150 of the continent’s leading banks.
The ECB said the banks that failed have taken steps this year to substantially boost their capital buffers. Twelve of the 25 failing banks already have covered their capital shortfalls, raising a collective €15 billion this year. That leaves another €9.5 billion that banks still need to come up with.
Banks that received failing marks, and which haven’t already filled their capital holes, now have two weeks to explain to regulators how they plan to overcome the deficits.
As part of the exercise, the ECB also reviewed the quality of bank assets to determine whether they were accurately valued. That process resulted in banks being forced to reduce the value of their assets by a total of €48 billion, the ECB said. The central bank also identified a total of €136 billion of troubled assets, known as non-performing exposures, sitting on the balance sheets of the eurozone banks.
More amusing, among the banks that failed, one after another are already lining up to comment that they already are "fixed." Some examples:
- BCP Says No Need to Plan Capital Increase, Forced Asset Sales. The board is confident that measures already decided in 2014 fully cover the capital shortfall resulting from the adverse scenario of ECB’s stress test, Banco Comercial Portugues says in regulatory filing. So nothing more has to be done.
- Muenchener Hyp has aggregated capital shortfall for the Comprehensive Assessment of 229 million euros. Muenchener Hyp raised 351 million euros of capital instruments eligible as CET1 capital in the year to Sept. 30. So nothing more has to be done.
- Caisse De Refinancement De L’Habitat had adjusted common equity Tier 1 ratio of 5.74% in the ECB’s asset quality review, versus a pass mark of 8%, the Bank of France says. CRH has already raised sufficient capital to make up the shortfall, Bank of France says. CRH is case of “shortfall but cured,” Bank of France Governor Christian Noyer says. So nothing more has to be done.
- Polish lender Getin Noble says has already filled capital gap after tests. Getin Noble says needs no capital increase after AQR tests as it has already filled capital deficit shown in asset review tests, Chief Executive Officer Krzysztof Rosinski speaks with reporters by phone today. So nothing more has to be done.
- HSH Nordbank, the world’s largest maritime lender with EU20b shipping portfolio, has CET1 ratio of 6.1% in adverse scenario of ECB’s stress test vs pass mark of 5.5%. HSH says results boosted by guarantee provided by owners, states of Hamburg and Schleswig-Holstein, which was raised to EU10b from EU7b in 2013. So nothing more has to be done.
- Axa Bank has aggregated capital shortfall for the Comprehensive Assessment of EU200.2m, ECB says. Axa Bank raised EU135m of capital instruments eligible as CET1 Capital in the year to Sept. 30, ECB says. Axa Bank also issued EU90m contingent convertible notes to parent Axa, for total capital increase of EU225m, Axa says in separate e-mailed statement. So nothing more has to be done.
And the punchline: while the three Greek banks failed, they all passed... on a dynamic basis. In other words, if one excludes reality, and replaces it with this curious state known as dynamism, all is well. So nothing more has to be done.
So if none of the major banks were impacted, and if the vast majority of failures don't have to do a thing, what was the point of the stress test? Here is WSJ's take:
European officials say this year’s tests are the strictest yet. They were preceded by ECB officials combing through the balance sheets of 130 banks, trying to gauge whether they accurately valued loans and other investments and forcing some banks to write down problematic assets such as overdue mortgages and corporate loans.
European Union officials and economists hope the publication of the test results, as well as the release of more than 1 million financial data points about the banks, will improve confidence in the industry. That, in turn, should make it easier for banks to issue affordable loans to household and business customers, spurring much-needed economic growth.
Wait, the complete collapse in demand for bank loans in Europe (at least those loans that won't soon be purchased by the ECB), is a function of banks not having confidence in each other? So all that was preventing Europe's record unemployed consumers from levering up had everything to do with fear that their lender would go insolvent tomorrow and nothing with the youth having no employment prospects, and negligible income for everyone else? Got it.
And now with bank confidence all restored and stuff, watch as this chart of European loan creation goes vertical, right?