So, eight European banks have failed the latest round of stress tests, says the Grauniad. No, it's nine says the Telegraph !
Stress tests ? Give it a month or so and you can report the situation in fewer words: nine banks fail. Or ten. Who knows ?
If they ain't raised enough capital by now, they're done for. You may as well give front-line soldiers a medical just before giving the order to go over the top.
By a strange coincidence, the entire C@W team is out of the country just now... steady in the ranks, here we go
ND
Well, they've laboured mightily and brought forth the expected mouse. For political reasons it wasn't possible for the Committee of European Banking Supervisors to run the only stress-test that counts right now, namely the shock to a bank of an actual sovereign default. So it's all as feeble as anticipated, though some good may come of there being a whole lot more numbers out in the open.
What they did instead was to impose 'haircuts' on the values of banks' bond-holdings. Another criticism that has been leveled at the process is that this only applied to trading accounts, not 'hold-to-maturity' assets. As it happens I don't necessarily agree with this line of attack: but the defence I could offer only serves to point out another weakness.
The reason why shocks should be used in stress-testing, rather than assumptions of (relatively) slow-time degradation of market / economic conditions - which is all a haircut represents - is because if an entity has a reasonable amount of time to defend itself, it (along with every other actor) will re-optimise its position as conditions evolve. It is impossible to model with any certainty what this would mean, but in most cases it will result in a much better outcome than passively taking the hit. That's how individuals, firms, sectors and whole economies adjust to, and mostly survive, tectonic shifts in conditions.
That could be given as a reason for omitting held-to-maturity assets from the haircut procedure.
But it simply highlights the need for proper shocks to be applied ! Amateurs ...
ND
So, eight European banks have failed the latest round of stress tests, says the Grauniad. No, it's nine says the Telegraph !
