Testing Testing
Aggregate results of European bank stress tests will be published today at 17.30 CET (Central European Time)/ 11.30 New York time by the Committee of European Banking Supervisors. From then on, individual countries supervisors or banks will publish their results with no exact timeline determined.
The test will cover 91 banks in 20 countries, which account for 65% of total assets in the EU banking system.
Parameters:
- Baseline GDP path will be European Commission’s latest economic forecast ( +1.0% in 2010 and +1.7% in 2011).
- Adverse scenario will be baseline minus 3.0%.
- The test will mark down mark-to-market part of sovereign securities bank holdings to prices observed at the trough of the selloff in May of this year.
- The minimum tier 1 capital ratio pass rate will be 6%. Banks that fall short of this ratio will have raise additional capital.
Questions:
- Only mark-to-market security holdings will be marked down? If a sovereign defaults they will value the securities at par…yeah the test is credible.
Conclusion:
- As sovereign securities account only about 5% of the total banking assets.
- According to Goldman Sachs: “…For a 3% drop in GDP growth, our best estimate is that resulting credit losses would amount to 1.5% of loans on aggregate EU balance sheets, or 0.7% of total assets (see European Weekly Analyst 10/26)…”.
I suppose in general all the major banks will pass with flying colors. Market impact, I tend to think that same reactions to same developments don’t repeat often (remember EU bailout? – it didn’t produce any kind of a equity rally, while U.S. one produced almost +70.0%), so probably a single day positive will be all we get.