Stress Test Fiasco

From Bloomberg:

European Stress Tests Show `Mildly Positive' Results, Credit Suisse Says

Results of the stress test on European banks released last week were “mildly positive,” according to Credit Suisse Group AG.

Barring government default outside of Greece, the stresses on banks are not that significant,” analysts led by Andrew Garthwaite, London-based global equity strategist at Credit Suisse, wrote in a report dated July 23. “Stresses in Europe have eased a lot in the past three weeks.”

European regulators found that seven banks need to raise a combined 3.5 billion euros ($4.5 billion) of capital. Germany’s Hypo Real Estate Holding AG, Agricultural Bank of Greece SA and five Spanish savings banks didn’t have adequate reserves to maintain a Tier 1 capital ratio of at least 6 percent in the event of a recession and sovereign-debt crisis, lenders and regulators said on July 23.


It appears that the public and investors are being fed more intellectual junk food by the banking system and their regulators. According to the Committee of European Banking Supervisors, the good news is that only 7 out of 91 banks failed the "stress" tests with less than 6% Tier 1 capital. What is not mentioned, is that approximately 20 banks have between 6 and 7% Tier 1 capital and the vast majority of banks are under 9% capital.

My question - who sets this bar for the banks to jump over so low?

In my view, Tier 1 capital in the 15 to 20% range is adequate, not 6 or 8%.

A drop of 6 or 7% in Tier 1 capital is almost a certainty in even a moderate recession if Generally Approved Accounting Practices (GAAP)are followed. Many banks and their regulators are gaming the system with these poorly constructed tests.

My suspicion - sometime in the near future (months or a year or so) the sovereign crisis will begin in earnest. Then, when we see bondholders receiving 80 cents or even 60 cents on the dollar for Greek, Spanish or even UK bonds, we will see the true resilience of the entire banking system.


  1. PW, I am glad you returned. I guess you had a nice vacation. PW, the stress test on U.S. banks was a joke as well. But, the stress test on the european banks was the greatest comedy of all. Not only was tier 1 capital ratios inadequate, the banks trading books were tested but not their held-to-maturity securities. Also, there was no test for the possibility of sovereign defaults by european countries. I agree that sovereing defaults are coming and the banks will unravel. I like this blogsite a lot.

  2. Oh boy.. I feel sad for both you guys for not taking advantage of this opportunity rather than wasting time on these kind of news. Who cares what you and I think, for now the Euro and Pound are rallying against the dollar and I am taking advantage of that :-)

    I hope you do the same. Good Luck!


  3. Wanted to add earlier but will do here..

    I take the news with Bailey's Irish Cream and open my positions ..hehee

  4. Walter, it does not matter what you think. I do not waste time on this kind of news. I learn and observe.

  5. The reality of European banking is best illustrated by the LIBOR funding "problem". Those who know: the European banks providing LIBOR quotes know that not all is well, and the proof is that LIBOR continues to rise -- insiders know, and are not prepared to risk their money with other European banks.

  6. I heard all of it, no problem. But I've always jealously protected my hearing with earplugs when in loud theaters, etc. My elderly mom and I could actually hear the sounds of the bats as they came swirling out of Carlsbad Caverns. The guide said usually only kids age 5 and under can hear their sonar.


  7. Hey Anonymous,

    Exactly my point friend. Doesn't matter what I or you or Bailey thinks or whatever the talking heads yap yap.. I follow whats going on currently and make $$$ of that. The real guys are busy making $$ and the losers talk talk and talk :-)


  8. Hopefully Dollie you are making some quick $$ than listening to losers who have nothing but talk, talk and talk.



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