Sunday, 17 July 2011

Bank Stress test adequacy questioned

I hesitated to opine on the rigour of bank stress whose results were announced on Friday as I no longer have access to Bloomberg and other financial news feeds Reading the business section of today's Sunday Telegraph confirms my misgivings about these much touted tests.

'EBA wanted tougher tests' is the page 2 headline. I quote, 'The European Banking Authority has attempted to quell City complaints over Friday's widely criticised industry stress tests telling analysts they would have liked to have made them harsher but were unable to do so', my italics. The EBA said they had faced great difficulties  getting different national regulators and banks to provide adequate data. They have my sympathy. I have been there and I have the tee shirt and scars to show for my visit.

As the ST says,' Tomorrow is the first chance for investors to give their view on the tests. Many are expecting a volatile trading session as markets assess the findings'. Indeed. Watch the PIIGS bond spreads, the Euro exchange rate and Eurozone bank share prices to get the market's view.

Another ST headline is 'Germany says Greek debt hit "unavoidable" '. It is strange how they cannot bring  themselves to use the truthful phrase, Greek default.  There is to be yet another European leaders meeting on Thursday for another emergency summit on Greece. I predict this meeting, like all their previous meetings on this topic, will produce much hot air and fine words but no action. Quite simply the EU is in denial on this issue and until they face the reality which I hope the markets will soon force upon them nothing will happen.

Banks have to raise huge amounts of capital on their 'name' in bond, commercial paper and short term money markets. Would you want to lend money to a Spanish or Italian bank?

Even our allegedly brilliant House of Lords, stuffed with all the retired  human expertise and excrement we can muster, is to mount an attack on the credit rating agencies for doing their job on sovereign bonds. Its called shooting the messenger and is an old British tradition.

There are another two pieces in the today's ST on differing aspects of the same topic. Our ruling political class however remains obsessed with phone hacking and press regulation, It is police corruption and regulation they should be concerned with on the home front but even that pales into insignificance besides what will happen in the money markets next week. As a US Treasury secretary once pointed out the bond market is the most powerful force on Earth!

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