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Europe's cheat sheet?

Discussion in 'Finance & Banking' started by Tropo, 26th Jul, 2010.

  1. Tropo

    Tropo Well-Known Member

    17th Aug, 2005
    Australian banks be eagerly awaiting the opening of European markets today to see whether the European banking stress tests – released last Friday night – have worked their magic.

    Banking analysts have spent the past few days crunching the tsunami of banking data that was released on Friday night. The big question is whether their tests will uncover new problems lurking in the banks’ balance sheets which again have the potential to roil international financial markets.

    The initial reaction to Friday night’s results was somewhat diffident. Markets had been bracing for the stress tests to reveal that between 10 to 20 European banks were short of capital, and would need to turn to investors to raise €30 billion to €90 billion in fresh equity.
    Instead, the European regulators deemed that only seven banks failed the tests, and their capital shortfall was a relatively modest €3.5 billion.

    Two of the troubled institutions that failed the tests – Germany's Hypo Real Estate Holding AG and Greece's ATEbank – are already nationalised, which makes their their capital deficiencies somewhat meaningless. The other failed institutions are Spanish savings banks, or cajas, which have been weighed down with problem loans as a result of the bursting of that country’s real-estate bubble.

    One of these savings banks, CajaSur, was taken over by the Bank of Spain in May, which triggered a bout of nervousness in financial markets. The other four Spanish cajas can tap a government bailout fund if they are unable to raise funds from investors.
    The surprisingly strong performance of the European banks led investors to question both the toughness of the tests, and the inconsistencies between countries.
    In particular, some investors pointed to the vastly different results from the US bank stress tests which were conducted in May 2009. US regulators tested 19 of the country’s top banks – including Bank of America and Citigroup – and ordered the banks to raise an additional $US75 billion in capital.

    Although European officials claimed on Friday that their tests were more demanding than the US tests, some investors were sceptical. In particular, they noted that stress tests didn’t include the possibility of a European country defaulting on its debt. Instead the tests measured the effect on banks’ capital from falling prices of the government bonds that they hold in their trading portfolios. They also queried whether the losses – or haircuts – that were applied to government bond prices were too generous.
    Still, the stress tests have have injected some much-needed transparency into murky world of European banks, many of which are not traded and disclose little financial information.

    For the first time, many of the banks revealed their holdings of European government banks. For instance, the top four French banks revealed that together they hold €11 billion of Greek government bonds and €6.3 billion of Spanish government bonds, while Spain's two giant banks, Banco Santander and BBVA, each hold more than €50 billion of their government's debt. But Germany announced that its banks would be releasing the full details of their sovereign debt holdings on a voluntary basis, and a number of German banks did not release their sovereign bond holdings on Friday night.
    One possible outcome is that the stress tests will cause a two-tier market to emerge.
    Those large banks which have been shown to be in a strong financial position will be able to easily raise funds in interbank markets, at reasonable rates.
    Other banks – whose results were more marginal – could find that they are forced to pay a hefty price for funding, or that they are shut out of the market altogether.

    Already, European wholesale markets are going to come under pressure, with French, German, British and Italian banks facing huge refinancing challenges over the coming 18 months.
    Australian bankers – and their customers – will be fervently hoping that the stress tests mean that international financial markets remain welcoming – at least to top quality borrowers.
    Karen Maley