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Will growth save Europe's banks?

Robert Peston | 09:09 UK time, Friday, 23 July 2010

The results of tonight's stress tests on Europe's banks would be less momentous if economic growth in the European Union is reinforced.

The widespread concerns that the tests simply aren't severe enough would not matter so much if the stresses that banks will actually face over the next two years or so turn out to be fairly mild.

Think of it as the equivalent of testing the robustness and integrity of an aeroplane. The prudent thing to do is recreate the conditions of a Force 10 gale or worse and see if the plane stays in the sky in such hideous conditions.

But if, in the engineering test, all that's simulated is a Force 5 gale, that wouldn't matter quite so much if in practice the relevant plane were never to fly through anything windier than that.

Which is why for banks' creditors and investors, yesterday's news that manufacturing and services output in the EU - and especially in Germany - appeared to be growing faster than expected, well that was encouraging.

The Purchasing Managers Indices indicated that EU growth may be picking up a bit of momentum. Which might mean that over the next year or two, the worst that confronts the banks will be a Force 5 gale, rather than a tornado.

But here's the thing: most of us wouldn't chose to fly in a plane that couldn't prove its ability to remain airborne through a tornado. And, over time, creditors, depositors and investors will shun banks that have insufficient capital and liquid resources to withstand substantial financial shocks.

That's why it's not just the results of the stress tests that matter, the publication of which banks have failed and need to raise capital: all the indications from governments, regulators and banks are that there won't be many of those.

So as important as the test results will be the new details provided tonight by Europe's banking regulators on the calibration of the adverse financial and economic conditions that the banks would have to endure.

As I've mentioned before, there are reasons to believe that the simulated macro-economic scenarios and the translation of those scenarios into loan and investment losses simply aren't severe or demanding enough.

Banks have had to prove that they can cope with a comparatively mild recession, with falls in government bond prices of up to 25% (in the case of Greece) but not default by governments, and with losses when other creditors default that are less than for the UK's equivalent stress tests.

What's more, two other arguable flaws in the tests are the Basel II definition of capital employed in the tests and the minimum ratio of capital to assets that banks have to prove they can preserve (see my note, Eurozone: Stressful 'haircuts' for why a 6% Tier 1 ratio under the Basel ll definition would allow some banks to disguise their intrinsic frailty).

Probably the best that can be said of the stress tests is that at least we should have a lot more information about the risks being run by Europe's biggest banks.

Transparency is almost always a good thing. But if the perception were to take hold that banks' weaknesses had been revealed but not corrected, that could undermine the confidence of creditors and investors in Europe's banks.

So what do investors and creditors actually expect the tests to reveal?

Well, Goldman Sachs has just published a fascinating survey of their views on the tests.

Here are the results: 10 of the 91 banks won't pass the test; just under 40bn euros of new capital will be raised, with roughly half being provided by taxpayers; and banks in Spain, Germany and Greece are expected to raise the most capital (d'oh!).

Perhaps more tellingly, some 37% of the 376 big investors who were polled fear that even after the stress tests and capital-raisings, European banks will still have too little capital.

That carries a slightly nerve wracking implication for European banks and regulators - which is that if fewer than 10 banks flunk the tests, and if the banks are obliged to raise significantly less capital than 40bn euros, there's a danger that investors will regard the tests as lacking credibility.

If the tests are perceived to lack credibility, they'll have solved very little, in that some European banks would continue to find it difficult to borrow from other banks and financial institutions - and the history of the past three years (and the history of the last few hundred years) shows that can be a precursor to meltdown.

Comments

  • Comment number 1.

    Banks have had to prove that they can cope with a comparatively mild recession, with falls in government bond prices of up to 25% (in the case of Greece) but not default by governments, and with losses when other creditors default that are less than for the UK's equivalent stress tests.

    What do you mean , relatively mild?

    So all that austerity was carried out by the rich financial elites of planet earth just to hurt the ordianry Greeks was it? To show us we should be scared...

  • Comment number 2.

    Growth? Where from, exactly?

    I think I've figured out the plan.

    If we are all chucked out to live in slums, Nairobi-type slums. THen in a few years when we've sold our sons, our only assets left and who bring home some money, we'll have pennies jngling in our pockets. We'll even be so confident as to think we can buy a little house to live in and take out a mortgage. We'll call that growth, and then after some time has passed, suddenly we'll realise we sold off our only asset, have no means of making this jingly coins. The mortgage won't get paid and it's goodbye growth, hello slum, all over again!

    Now why bother testing the jingle of pockets when you know they are a bit on the empty side, when you know they cant pay the bills, the mortgage payment due a week on Friday?

    Any test you pass is not as stringent as a UK driving test, more a quick whizz around the car park Maryland USA style test. You can do that on the wrong side of the little fake roads, our side, if you know what I mean, and still pass it. I know - that's what I did!

    All we've done is the same as what the IMF inflicted on Argentina. They had the hard swift kick and lesson learned. A wee riot and the elite spivs were chucked out.

    We've taken thirty years and are still being taught a lesson in what not to do. We are so thick, so wrapped up in watching X-factor or rubbish, we are way, way behind Latin America in wisening up.

  • Comment number 3.

    Most of us have figured out that it is a huge Ponzi scheme. That was not hard.

    However, we all indulge in self delusion, and if we believe that it will fly, then it will fly!

  • Comment number 4.

    Never mind stress testing the banks we should be testing the EU. They are still yet to have their accounts signed off. How can this be acceptable. For all we know they may be in as bad a shape as the finances of the so called PIIGS. There may be call for all the member states to stump up x billion to bail out the EU. The Germans would just love that.....

  • Comment number 5.

    Robert,
    You mentioned "transparency" and "Goldman Sachs" in the same article.

    That is a problem.

    Goldman's views are interesting, but nothing someone with half a brain wouldn't have worked out anyway.

    What is more suspect - seems Goldman bet or hedged that AIG would collapse. Repeat of RBS maybe? (ps. RBS believe senior Bank Execs will be laid off this year - Australia and Far East)

    What might be more fascinating, is how many of the banks that FAIL this test were either:

    a) advised by Goldmans
    b) bet / hedged against by Goldmans

    More fascinating than the Eurozone results though will be when Feinberg (USA) reveals today, which BANKS made INAPPROPRIATE payments to executives of over $1billion from US TAXPAYER BAILOUTS.

    Should make for some unsettled seats in the City and the Caymans.

    Time for London regulators to follow suit.

  • Comment number 6.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • Comment number 7.

    Growth - oh.. but we are growing at 1% plus so everything is all right (and we can return to the insane economics that gave use the crash.)

    The banks and lenders MUST be regulated properly - growth or not. Never again can they be allowed to lend in such as way that is assuredly calculated to undermine their own balance sheets and inevitably require a government/taxpayer rescue.

    All of the stress tests show us is that the exceedingly opaque balance sheets, without mark to market valuations, pass - and in the UK only for the 4 banks tested.

    What the crash proved is that the special investment vehicle edifice and the small banks caused the collapse. Those CDOs and CDSs which Goldman sacks deliberately designed to fail were most catastrophic when they were built up upon mortgages that were highly likely to not perform. Yet absolutely nothing substantive is being done about this. Indeed the whole world is closing its eyes to the the problem by deliberately running an interest rate regime calculated to support this sector - and directly to engineer the most dramatic transfer of wealth in recorded time from the prudent to the imprudent. This is the economics of the madhouse.

    Debtors are being encouraged to borrow more than they can afford and because of the regulators structures lenders have to comply. Here is a nice expression of the regulatory morass and the perverse consequence that arise from bad regulation. The first £50,000 (soon the 100,000 Euro) of deposits are guaranteed by the state in the UK. Now the FSA regulates institutions and the 50K is per regulatory registration. So a fly by night dodgy banks that is authorised that you would not dream of lending money to is able to attract depositors of 50K. These deposits would normally be kept in more substantial institutions, but because of the blanket 50K limit there are only guaranteed to 50K too. So the larger institutions are deprived on deposits while the fly by night are supported. (Any blanket registration limit will have this consequence.) The effect of this should be a rise in small institutions as well as an enormous headache for depositors as for each million they need to find and manage 20 institutions different deposits! This is a mad way to run regulation - the guarantee should relate to the size of the institution's balance sheet. The present system is a perverse consequence of regulation - like many of the consequences of the way we manage the economy!!!

    By the way, why were only 4 UK banks stress tested? Why were no UK building society tested? (After all Hypo Real was stress tested in Germany.) Who connived at this?

    'Growth and austerity' - these do not go together - even the Fed is saying that austerity can wait. Why are we destroying our economy doing something the the USA will not do?

  • Comment number 8.

    One understands the dilemma with stress tests although if they were tougher at least we would have to deal with a closer encounter with reality. It is how much of the iceberg of toxic debt remains below the waterline that matters combined with the potential for strangled growth following the lemming like rush to austerity across Europe. This is the real stress test yet to be endured.

  • Comment number 9.

    Robert,

    I am afraid you have misunderstood the purpose of the tests.

    It is not to really test the banks but to re-build confidence.

    80 are good...honest...

    Convinced?

    Me neither.

  • Comment number 10.

    > The prudent thing to do is recreate the conditions of a Force 10 gale or
    > worse and see if the plane stays in the sky in such hideous conditions.
    > But if, in the engineering test, all that's simulated is a Force 5
    > gale, that wouldn't matter quite so much if in practice the relevant
    > plane were never to fly through anything windier than that.

    Only a banker would be stupid enough to try to pass this off as a proper "test". Look, banker-chumps, we want to estimate the storm needed to crash banks - we don't want to know if they can fly though a slight breeze!

    I'll make it simple for them - we want to know the strongest and weakest banks, OK guys???

    It goes without saying that those secretive, double-dealing bank-testers must release their finding to public scrutiny, because we are the bank users and we are the ones who must know the figures.

  • Comment number 11.

    All these doom and gloom reports are making me nervous :-) I DO believe that the Euro is a dead man walking, (no one told them yet, or rather, they refused to listen) and I also believe that property prices are overdue a major correction.

    So, I have 30 years of pension savings tied up that I can't get access to until I retire. If I want to move the funds around, what would be the least badly performing type of fund in a melt-down recession? Over the last 30 years I would almost have been better off putting the money in a shoe box under the bed and certainly would have been better putting it in a high interest savings account Plan for the worst, hope for the best....

  • Comment number 12.

    Its the LIBOR, stupid!

  • Comment number 13.

    I'm watching like a (old'ish) hawk wondering what they are NOT going to say about Greece and Spain. If what they say is intended to leave me feeling "all is fine," (no really! er..who sniggered,) in Southern Europe we'll know it's been another Euro white-wash.

  • Comment number 14.

    International fantasy banking/trading is STILL the MOST destructive behaviour for most areas of personal banking/pensions FOR ordinary people?

    Is it, therefore, realistic to promote that ALL UK and European governments to create the possibility of government-owned banks to allow 'normal' everyday working, redundant, pensioner et al to put their money and save in such protected institutions that invest in what their country needs - especially on a local level - thereby improving returns to investors with a genuine stake in their whole economy and community?

    NO, this is not a credit union idea that helps communities to avoid loan sharks.

    This is much bigger and more fundamental to economic growth - and YES, a 'blast from the past'? Bizarrely, that's how ALL banks and building societies started? Apparently, this basic information has been 'conveniently' erased?

  • Comment number 15.

    5. At 10:30am on 23 Jul 2010, sanity4all wrote:

    I heard a story that a french finance official said they don't use Goldman because there would be riots in the streets if they did!

  • Comment number 16.

    I always go by the principle that -if someone cheats, use their cheating against them.

    Therefore -since they are all going to 'pass' the stress tests- enforce some legislation that forbids a bail-out (by any name) when the real storm comes. They should all be allowed to fail if they are comatose.

  • Comment number 17.

    What's the point of a stress test that doesn't test stress just a mild disillusionment?
    I'd love to get a reading of stress hormones in the air around the city - they are probably measurable. As is the sound of tightly crossed fingers.
    onebadmouse seems to thing if we all believe its gonna work it will. Alas the emperor is visible through his new suit and its only a matter of time before someone works out how to make a killing shorting it out and of we go again back to reality.

  • Comment number 18.

    "11. At 11:22am on 23 Jul 2010, sunk_optimism wrote:
    Over the last 30 years I would almost have been better off putting the money in a shoe box under the bed and certainly would have been better putting it in a high interest savings account Plan for the worst, hope for the best....
    ......
    You would have been better off buying some gold. Wished I had done so.

  • Comment number 19.

    The real stress testing is beginning to show up. See BBC article: "Health gap 'wider than in Great Depression'".

    Much more needs to be done to make the financial sector socially useful. Too many people remain in a position to use power and wealth to damage society for their personal gain.

    Example:
    A debt free homeowner near where I live put up a fight but was ultimately evicted to make way for a deprived area regeneration project. She explained to me the terms of her shared ownership mortgage.

    She'll be paying off the mortgage until she's 102 years old.
    If the property increases in value when sold, the lender takes a cut.
    If the property decreases in value, the borrower must pay the lender the difference.
    She is not allowed to sublet rooms to students, which is how she made ends meet previously.
    She cannot leave the house for more than a month without breaching the terms of her mortgage.

    Let's not allow the stress tests to let banks off the hook.

  • Comment number 20.

    Gale force 5? No such thing Robert, it's merely a strong breeze.
    Gale force is force 8, but you already know that.
    But if you make the stress tests so strong, force 10 - storm - the banks fail the tests and it becomes a self fulfilling prophecy of doom.
    So you just set the stress to what the market can bear.
    Simple.
    Luckily we have politicians to work all this out.
    Where's the problem?

  • Comment number 21.

    If it turns out that all the banks are solid as a rock (if you'll pardon the expression), how come they've got so much tax payers money at the moment and how come there is so much talk of shortly having to give them more, as they may not be able to pay it back?

  • Comment number 22.

    The primary problem remains as one of ethical behaviors in the banking industry. The collapse was just that, unethical dealings within the industry from the banks to the rating houses. Some set of punishments needs to be put in place or this will only happen again. Capitalization of loan backing instrucments will limit the damage but not prevent it. Direct legal actions against Boards of Directors and CEO and CFO's must be put in place so that personal responsbility can be attached to decisions that impact beyond their corporations. Accountability is the mother of caution.

  • Comment number 23.

    #15. copperDolomite wrote:

    "I heard a story that a french finance official said they don't use Goldman because there would be riots in the streets if they did!"

    I doubt very much that enough people would care enough for there even to be a mild outbreak of tutting, never mind 'riots in the streets' (which many of the regular doom-monger contributors to this blog have now been hoping for for almost 18 months, but which has still failed to materialise).

  • Comment number 24.

    #18. Averagejoe wrote:

    "You would have been better off buying some gold. Wished I had done so."

    Not necessarily true. Over the past 30 years gold has been a pretty poor investment compared with equities or cash. It's only in the past ten years that it has out-performed other forms of investment (and anyone who moved out of equities and into gold at the end of 1999 will have made a killing).

  • Comment number 25.

    Only a banker would be stupid enough to try to pass this off as a proper "test". Look, banker-chumps, we want to estimate the storm needed to crash banks - we don't want to know if they can fly though a slight breeze!

    Or a private consultancy that builds levees.
    Or an oil company that just knows they can't bust open deep oil wells.
    Or a city spiv who can improve school performance (throw out the poorer kids...)
    If no one can give detailed answers, allow detailed observations well, then oobviously the experts have it in hand.

    Same management school. Obviously.

    It is starting to become funny in a Monty Python kind of way.

  • Comment number 26.

    The myths peddled on here are really weird. 1. Banks don't invest in businesses, they lend to businesses and individuals so they can choose what to do. 2. traditionals mutuals lent to foster mortgages and home ownership - what Fannie and Freddie did in the US was to do so as Government agencies to implement social policy. 3. Gold is a poor investment - it has no inflation element, today's gold price is worth only half its inflation adjusted high. Oh, and people find it easy to steal. 4. Jacques Cartier, if you want to know the weakest and strongest, let the market do its work. the weak ones will go bust. stress tests are alwys subjective. 5.the Goldman investment vehicles needed idiot investors to take an opposite view - if they did, blame them not Goldman. After all no-one forced them to buy. 6. "banks in Spain, Germany and Greece are expected to raise the most capital (d'oh!)." I don't get this clever clever comment - why would you expect the German banks to be in this situation. Is Mr Peston a financial analyst and knows about German banking?

  • Comment number 27.

    18. At 12:35pm on 23 Jul 2010, Averagejoe wrote:

    "You would have been better off buying some gold. Wished I had done so."

    There's still time....just get the physical stuff and not the promise through an ETF.

    Also - it could be worse - you could have "swapped your gold for dosh".
    That was the first sign of the FIAT currency failing, even in the 90's there weren't adverts to buy your gold.

    You wait until we get "swap your copper for cash", or "new lamps for old" and the people gleefully strip out their central heating thinking they're getting a good deal in return of some worthless paper money.

    The sheepole will start noticing when the power keeps going off because people are stealing the cables out of the sub-stations. A few nights in the dark with no TV often focuses the mind on such things...

    http://news.bbc.co.uk/1/hi/england/nottinghamshire/8042529.stm

  • Comment number 28.

    Censorship sounds so much nicer when you call it moderation. It's frustrating when it takes so long.

  • Comment number 29.

    18. At 12:35pm on 23 Jul 2010, Averagejoe wrote: "You would have been better off buying some gold. Wished I had done so."


    Very true. Gold is superior to paper and electric money in all the obvious ways in that it holds an intrinsic value that will still be there when the entire fabric of the economy collapses.
    Another hidden use is that a gold bar can also be used as a cudgel to beat a naughty banker around the back of the head when he makes a mess in the economy, unlike paper money which is only good really for purposes of a symbolic suffocation, which is far less practical.

  • Comment number 30.

    Ahhhh stress tests, that old chestnut.

    When will these stupid regulators get it? Stress tests do not work unless they live upto their name. Every major casino (read banks) conducts stress tests already. Its how they calculate their capital (Pillar 2 in the UK). So the banks that flunk the test, have not been assessing their capital correctly? Oh deary me... how many days worth of trading profits will the regulator charge them as a fine? I bet, I stress test my own finances better than the whizzkid mathematicians who conduct these tests (honestly I grew up respecting mathematicians, now I loathe them, because the majority work for banks and can't string a sentence together without dipping in and out of technical jargon).

    I am looking to buy a house, I calculate how much savings I have, I work out how much I will need in order to survive for atleast a year, whilst having lost my job, no access to credit, pay for my mortgage, and even have some aside for emergency expenses like paying for the funeral of an elderly parent. Then I arrive at what deposit I can afford to place. Thats what you call a stress test.

  • Comment number 31.

    "The 91 banks being stress-tested by regulators were only examined on European sovereign debt losses for the bonds they trade, rather than those they hold to maturity"(European Central Bank document) -hahahahhahaha

    This isnt strees testing its tickling the ribs

    I hope the markets see this for what it is and "carpe diem"

  • Comment number 32.

    At 1:05pm on 23 Jul 2010, PacketRat wrote:

    There is something wrong here:

    "If the property increases in value when sold, the lender takes a cut.
    If the property decreases in value, the borrower must pay the lender the difference."

    Judging by what you wrote it sounds like a shared appreciation mortgage. If it is shared ownership, then the other owner would get the cut, not the lender.

    She'll be paying off the mortgage until she's 102 years old.
    I'm sure there are rules against this. The lender is not, under FSA rules, allowed to lend that long. Suggest she contacts Financial Ombudsman for case of mis-selling

    "She is not allowed to sublet rooms to students, which is how she made ends meet previously." Normal for most mortgages

    "She cannot leave the house for more than a month without breaching the terms of her mortgage." Again, normal for most mortgages

  • Comment number 33.

    23. At 1:36pm on 23 Jul 2010, rbs_temp wrote:
    #15. copperDolomite wrote:

    "I heard a story that a french finance official said they don't use Goldman because there would be riots in the streets if they did!"

    I doubt very much that enough people would care enough for there even to be a mild outbreak of tutting, never mind 'riots in the streets' (which many of the regular doom-monger contributors to this blog have now been hoping for for almost 18 months, but which has still failed to materialise).

    _________________________________________________________

    This has nothing to do with doom-mongering this is getting the controllers of the Earths wealth, animal or mineral that resources are finite and SYSTEM used by those controllersd that relies on an exponential model is doomed

    but of course being a banker you dont understand that because even your bonuses use an exponential model!

  • Comment number 34.

    "I doubt very much that enough people would care enough for there even to be a mild outbreak of tutting, never mind 'riots in the streets' (which many of the regular doom-monger contributors to this blog have now been hoping for for almost 18 months, but which has still failed to materialise)."
    If anyone is good at rioting on the streets and having a revolution, rbs temp, it’s the French.

  • Comment number 35.

    23. At 1:36pm on 23 Jul 2010, rbs_temp wrote:
    #15. copperDolomite wrote:

    "I heard a story that a french finance official said they don't use Goldman because there would be riots in the streets if they did!"

    I doubt very much that enough people would care enough for there even to be a mild outbreak of tutting, never mind 'riots in the streets' (which many of the regular doom-monger contributors to this blog have now been hoping for for almost 18 months, but which has still failed to materialise).

    -------------------------------------------------------------------------

    Another banker sniggering from his/her high tower. Look below you sir, its not bricks... its the ace of clubs, knave of hearts, 8 of diamonds, and its all about fall down real soon!

  • Comment number 36.

    What on earth is going on on these forums? Moderators - the politics blog has been closed for a week, and yet you have only managed to moderate ONE comment here in 45 minutes? If you can't be bothered to do your job, then please switch moderation to reactive only (like it should be in any case except for CBeebies)

  • Comment number 37.

    24. At 1:44pm on 23 Jul 2010, rbs_temp wrote:
    #18. Averagejoe wrote:

    "You would have been better off buying some gold. Wished I had done so."

    Not necessarily true. Over the past 30 years gold has been a pretty poor investment compared with equities or cash. It's only in the past ten years that it has out-performed other forms of investment (and anyone who moved out of equities and into gold at the end of 1999 will have made a killing).
    -----------------------------------------------------------------------
    And also, recently, in and out of oil, copper and grain futures.

  • Comment number 38.

    24. At 1:44pm on 23 Jul 2010, rbs_temp wrote:
    #18. Averagejoe wrote:

    "You would have been better off buying some gold. Wished I had done so."

    Not necessarily true. Over the past 30 years gold has been a pretty poor investment compared with equities or cash. It's only in the past ten years that it has out-performed other forms of investment (and anyone who moved out of equities and into gold at the end of 1999 will have made a killing).

    -------------------------------------------------------------------------

    Ofcourse, hindsight is a wonderful thing but never made anyone money. Did you sir move your money out of equities prior to your kinsmen creating the mess we are in now? Would have been jolly good to have been in on that little secret.

  • Comment number 39.

    23. At 1:36pm on 23 Jul 2010, rbs_temp wrote:
    #15. copperDolomite wrote:

    "I heard a story that a french finance official said they don't use Goldman because there would be riots in the streets if they did!"

    I doubt very much that enough people would care enough for there even to be a mild outbreak of tutting, never mind 'riots in the streets' (which many of the regular doom-monger contributors to this blog have now been hoping for for almost 18 months, but which has still failed to materialise).


    'Europe freezes out Goldman SachsShocked by past deals with Italy and Greece, governments are excluding the Wall Street bank from sovereign bond sales.

    In the Observer (http://www.guardian.co.uk/business/2010/jul/18/goldman-sachs-europe-sovereign-bond-sales%29. Not all of the EU citizens are as fascinated by X-faxtor as the Brits, some of them enjoy some traditions, like reminding the elites, just who is important in the big scheme of things!

  • Comment number 40.

    24. At 1:44pm on 23 Jul 2010, rbs_temp wrote:
    #18. Averagejoe wrote:

    "You would have been better off buying some gold. Wished I had done so."

    Not necessarily true. Over the past 30 years gold has been a pretty poor investment compared with equities or cash. It's only in the past ten years that it has out-performed other forms of investment (and anyone who moved out of equities and into gold at the end of 1999 will have made a killing).


    I took out an endowment in 1999, what a mistake that was. And I know you dont believe the monetary system will collapse in the next few years, but if it does it will prove even better investment.

  • Comment number 41.

    #26Peter Bench

    "1. Banks don't invest in businesses, they lend to businesses and individuals so they can choose what to do."

    Uhmmm.. So which banks own McCarthy & Stone the retirement home builders?

    Is it different if the bank is owned by the taxpayer then?

  • Comment number 42.

    The tests - no matter how severe they are in Europe - are a lot more severe than anything the Feds did in the United States. How do I know?
    American banks keep falling like over-stressed dominos; there is no sign of an end to it. So what kind of stress test really happened on the American side?
    Personally, I see little correlation between
    - physically stress-testing a Boeing and
    - economically stress-tersting a financial institution.
    I can't even conceive of the two sets of tests in the bilateral sides of my brain. It's just plain incongrous.
    However, in respect to your comparison, I believe that the American banks were stress-tested on a clear and sunny day, with any wind and no rain and these banks were deemed aerodynamic. This is why they keep dropping like flies!
    Your absolutely right when you say: most of us wouldn't chose to fly in a plane that couldn't prove its ability to remain airborne through a tornado. Therefore over time, creditors, depositors and investors will shun banks that have insufficient capital. But this is exactly what is happening in the United States where it is becoming harder and harder to find any financial institution that can get off the ground, never mind fly. It's down the runway - plop, plop, groan and fail.
    The European stress tests matter because they are fairly rigorous and will certainly identify lack of capitalization, of which - like you - I do not believe there will be many banks identified.
    Why?
    Because the European bank balance sheets have been (are being) cleaned up of those riddling American convoluted financial instruments called negative credit default swaps and bundled derivatives.
    More European banks will endure than American banks. That's a fact you can take to the bank!
    Quote: "...the translation of those scenarios into loan and investment losses simply aren't severe or demanding enough". Surely we speak of the American stress test, which was no stress test at all?
    I worry less about Basel II Tier 1 ratio and capitalization than I do about the total lack of any Basel II regulation in the United States; I mean absolutely NONE, ZILCH.
    In fact, even the latest American financial reform package is no financial reform at all. Id you haven't already done so, read the thing and you will see what I mean. Pretty words on 2,000 pages of paper!
    Goldman Sachs? We're paying attention to Goldman Sachs?
    Well, maybe that's a good idea, considering Goldman knows where it traded in negative credit default swaps, where it shorted and where it unloaded all those bundled derivatives: all those ugly financial instruments that Brussels has been working like mad to get off the European books.
    All those woriied investors that you speak about, have they no fears about the American dollar, the American lack of capitalization, the American trillion dollar debt, the dominos?
    If the European stress tests are perceived to lack credibility, all the stress-testors need do is show us the books; there are plenty of accountants, plenty of financial wizards who can affirm or not, the quality and transparency of the European stress testing.
    Europe will not melt down...but I have my doubts about that country across the Atlantic.

  • Comment number 43.

    # 27. At 1:54pm on 23 Jul 2010, writingsonthewall wrote:

    This comment is awaiting moderation. Explain.

    ..................................................

    2 hours to clear moderation! and then it may get reffered. I don't know why anybody bothers with this blog.

  • Comment number 44.

    23. At 1:36pm on 23 Jul 2010, rbs_temp wrote:

    "I doubt very much that enough people would care enough for there even to be a mild outbreak of tutting, never mind 'riots in the streets' (which many of the regular doom-monger contributors to this blog have now been hoping for for almost 18 months, but which has still failed to materialise)."

    Au contraie mon amie.

    I know several people who live in France as my sister lived there for a while, I enquired as to why there hasn't been the usual outpouring of worker solidarity in France - you know, blocking the roads, blocking the ports etc.

    Sssshhh - I was told nobody has told them about the cuts yet!

    Rest assured, despite your ever increasing desperation for this to all 'blow over quietly and quickly' - I'm afraid it's just not going to happen.
    This is what the French do when they are unhappy - does this look like tutting?
    http://www.youtube.com/watch?v=gSMSOt3Ij4I

    ...but of course you will take the line from the meeeja that this is merely about a shooting - and not a consequence of unemployed youth having nothing better to do.

    What about the troubles in Ireland? - bit quiet during the boom, even managed a peace settlement. Suddenly it's all gone bad again - nothing to do with unemployed youths having nothing better to do of course.

    http://www.youtube.com/watch?v=v0wYSVtf8gw

    Maybe you need something closer to home....Luton?
    http://www.bbc.co.uk/news/uk-10731835

    ...or Birmingham?
    http://www.youtube.com/watch?v=9JX3dJC8_I0

    ...of course these are nothing to do with the recession - even though Marx (and others) made it abundantly clear that the economic damage that Capitalism will cause always drives the ignorant to blame those who are least able to defend themselves leading to the rise of far right parties - it's what Hitler played on to get into power. I suppose it's raw tribalism (blame those who look least like you) being brought through by the wonders of Capitalism.

    Oh no, none of this counts does it - you won't believe it until there is a bottle thrown through your own window - then you might actually realise what I have predicted will come true.

    Until then - you continue enjoying the bubble you live in and hope when it pops it doesn't shock you into total silence.

  • Comment number 45.

    Two hours to moderate. By the time I get to read the comments they are history. What is the point in that?

  • Comment number 46.

    Breaking at 4pm GMT...

    First reports are suggesting (via a leaked ECB methodology paper) that the vast majority of sovereign debt liability held by eurobanks is NOT repeat NOT included in the report.
    New York observers describe the omission as 'incredible'.

    Follow nbyward's the Slog at Blogger

  • Comment number 47.

    26. At 1:53pm on 23 Jul 2010, Peter Bench wrote:

    "The myths peddled on here are really weird." - myths?

    "1. Banks don't invest in businesses, they lend to businesses and individuals so they can choose what to do."
    Well actually banks lend to businesses with money they have previously extracted by previous lending which has all been created from production or other human activity.
    Their prime target is to extract even more, which helps them choose which businesses are suitable or not.
    They're not judging a loan based on the viability or use to society of that business, merely the wealth they think they can extract from it. Which is why traditionally businesses with an addiction factor (booze, fags) attract more than their fair share of investment - and if it weren't for regulation - a whole lot more..
    It's also why banks are not interested in lending to environmental startups (unless there's some PR in it for them)
    You claim that "thay can do what they want" presumes the capital they have accumulated allowing them to make these loans was theirs to extract in the first place - that is where I differ, because I actually recognise the source of that capital - and it's certainly not from banking.


    "2. traditionals mutuals lent to foster mortgages and home ownership - what Fannie and Freddie did in the US was to do so as Government agencies to implement social policy."
    ...but they made a profit while doing so - they didn't do it as a favour.


    "3. Gold is a poor investment - it has no inflation element, today's gold price is worth only half its inflation adjusted high. Oh, and people find it easy to steal. "

    ...and what about the history of FIAT currencies - did you weigh that up before you decided Gold was not a good investment? If you read your history you will see that Gold has outlived every other FIAT currency.

    "4. Jacques Cartier, if you want to know the weakest and strongest, let the market do its work. the weak ones will go bust. stress tests are alwys subjective. "

    Ah - but the market can never do it's work - for in the business of capital accumulation, any opportunity to legally move the market to your advantage is always taken.
    It's also no good finding out who the weakest and strongest are after the fact (when they've failed) - you need to know previously. Now how does one assess the viability of investment?
    The facts must be freely available and untainted before such decisions are made - no coersion allowed...

    http://www.bbc.co.uk/news/world-us-canada-10718310

    "5.the Goldman investment vehicles needed idiot investors to take an opposite view - if they did, blame them not Goldman. After all no-one forced them to buy."

    So when a pensioner buys their pension and their advisor makes a suggestion, part of which include the Goldman vehicle - should this pensioner be well versed in the complications of portfolio diversity?
    Is the lose terminology used by the adviser of Low, Medium and High risk suitable for the millions of layers of complexity layered on each investment?
    I bet you think you understand what your pension is in and how it all works, but I bet you don't. I have the priviledge of 10 years in finance and I still don't know everything my pension is invested in - fortunately for me it's so tiny it doesn't matter.


    "6. "banks in Spain, Germany and Greece are expected to raise the most capital (d'oh!)." I don't get this clever clever comment - why would you expect the German banks to be in this situation. Is Mr Peston a financial analyst and knows about German banking? "

    I think because German banks hold the most debt obligations of the rest of Europe - especially the southern parts.

    It does seem that you are quite OK to hand your life and the life of your descendants into the hands of the banking system.
    Please do not try to justify this desire for slavery - I'm happy for you that you see your future in slavery, but I would rather not thank you.

  • Comment number 48.

    Robert - have enjoyed your writings on this topic and think your assessment of these 'stress tests' is absolutely on the money (no pun intended).

    With regard to your last para, I would just say that I think the implications of a perceived lack of credibility of these tests will be far more serious than them having merely 'solved very little'.

    Going back to ideas in your posting about 'Europe's dangerous contempt for markets', if the results demonstrate a flagrant disregard for the need to make these tests credible, that will make even more evident to the markets how little the EU appreciates the fundamental seriousness of the situation.

    Yet if the body that purports to be the authority and ultimate backer for the currency of many of the affected countries - plus the co-ordinator of the bloc's economic response - is further revealed to be unable to recognise the realities of the situation (whether by reason of ineptitude or arrogance) then there could well be financial mayhem.

    Personally, I think the euro crisis has shown the single currency project to be fundamentally flawed (as many warned from the start would become very evident in the 'bad times') and the EU incapable of reacting quickly, decisively and even competently enough to deal effectively with Europe's problems.

    In my view it's long past overdue for the politicians to start discussing new, more flexible and (while they're at it!) more democratic structures to replace today's out-dated and over-centralised EU, to take forward European co-operation in the 21st century.

    all the best,

  • Comment number 49.

    Oh dear, why is it the things you wait for longest disappont you the most?

    http://online.wsj.com/article/SB10001424052748703294904575385012830206190.html?mod=googlenews_wsj

    Not even covering sovereign debt crisis? - Was this a stress test, or a jest test?
    ...here's some more info - check out these percentages - do they sound 'stressful'?
    http://www.bloomberg.com/news/2010-07-23/eu-bank-stress-tests-apply-only-to-traded-bond-portfolios-document-shows.html

    "The tests will assume a loss of 23.1 percent on Greek debt, 14 percent of Portuguese bonds, 12.3 percent on Spanish debt, and 4.7 percent on German state debt, according to the document obtained by Bloomberg News. U.K. government bonds will be subject to a 10 percent haircut, and France 5.9 percent. "

    Of course this report is summed up with the wonderful phrase
    "The decision “allows banks to basically underestimate their exposure to distressed peripheral debt,” Brown Brothers Harriman, the New York private bank founded almost 200 years ago, said in a note to clients today. “By leaving out stress tests on the banking book, then a true picture of bank balance sheets will clearly not be obtained.” "

    Don't worry - I'm sure some suckers will buy it - I fear most will become even more 'stressed'

  • Comment number 50.

    29. At 2:23pm on 23 Jul 2010, warwick wrote:
    18. At 12:35pm on 23 Jul 2010, Averagejoe wrote: "You would have been better off buying some gold. Wished I had done so."


    Very true. Gold is superior to paper and electric money in all the obvious ways in that it holds an intrinsic value that will still be there when the entire fabric of the economy collapses.
    Another hidden use is that a gold bar can also be used as a cudgel to beat a naughty banker around the back of the head when he makes a mess in the economy, unlike paper money which is only good really for purposes of a symbolic suffocation, which is far less practical.


    Pound notes aren't even big enough to make one of those newspaper cudgels they used to sneak into football matches way back when things were a bit rougher are they. Could dig out the sticky back plastic I suppose and try that if the worst comes to the worst and you need to defend yourself from a man in a suit.


  • Comment number 51.

    Should we not prohibit high street banks from holding Government debt, particularly overseas Government debt?

    Government spending creates hugh distortions to consumption, hence GDP and surely we should seek to ensure that money available for business is not siphoned out of the system by Governments running hugh and unsustainable ficsal deficits.

  • Comment number 52.

    27. At 1:54pm on 23 Jul 2010, writingsonthewall wrote:
    18. At 12:35pm on 23 Jul 2010, Averagejoe wrote:

    "You would have been better off buying some gold. Wished I had done so."

    There's still time....just get the physical stuff and not the promise through an ETF.

    Also - it could be worse - you could have "swapped your gold for dosh".
    That was the first sign of the FIAT currency failing, even in the 90's there weren't adverts to buy your gold.

    You wait until we get "swap your copper for cash", or "new lamps for old" and the people gleefully strip out their central heating thinking they're getting a good deal in return of some worthless paper money.

    The sheepole will start noticing when the power keeps going off because people are stealing the cables out of the sub-stations. A few nights in the dark with no TV often focuses the mind on such things...

    http://news.bbc.co.uk/1/hi/england/nottinghamshire/8042529.stm
    ------------------------------------------------------------------------
    Not like you to be behind the times, WotW! We've had that already about three to four years ago. The last time I looked though (not recently) the copper price had collapsed causing problems for Zambia and elsewhere. Some thieves were badly burnt trying to dismantle a sub-station and one or two cars were damaged and a pedestrian hurt because manhole covers were being stolen.

    The good old bankers put an end to that! Their little distraction got people's minds onto other things.

  • Comment number 53.

    47. At 4:20pm on 23 Jul 2010, writingsonthewall wrote:

    ...and what about the history of FIAT currencies - did you weigh that up before you decided Gold was not a good investment? If you read your history you will see that Gold has outlived every other FIAT currency.
    ---------------------------------------------------------------------
    Ah, but Fiats last a lot longer, and stay in better nick, than they used to. Lots of those dinky new 500's being sold.

    Back to dreams of thirty Abarths circulating like a bunch of demented bees, through the curves and down the back straight to the final corner before starting lap 2.

    Nighty night and keep yer lines tidy!

  • Comment number 54.

    32. At 3:09pm on 23 Jul 2010, yam yzf wrote:
    At 1:05pm on 23 Jul 2010, PacketRat wrote:
    There is something wrong here:


    Quite right, I'm thinking in terms of "them" - lender/owner - and slipped up by stating lender instead of owner.

    I'll take your word for how normal this is. My point was more that these new restrictions are unhelpful to the previously unfettered homeowner.

  • Comment number 55.


    Sorry, been busy today so haven't read all of the above. Sorry if I repeat anything or try to add anything to a debate that has has moved on.

    http://www.bbc.co.uk/news/business-10737352

    http://www.bbc.co.uk/news/business-10747548

    http://www.bbc.co.uk/news/business-10741328

    http://www.bbc.co.uk/news/business-10740185

    http://www.bbc.co.uk/news/business-10741094

    http://www.bbc.co.uk/news/business-10739538

    http://www.bbc.co.uk/news/business-10726444

    http://www.bbc.co.uk/news/uk-10724560

    http://news.bbc.co.uk/sport1/hi/football/teams/c/crystal_palace/8850376.stm

    http://www.bbc.co.uk/news/business-10739111

    http://www.bbc.co.uk/news/business-10724884

    And companies are buying other companies, surely a sign that liquidity is back.

    http://www.bbc.co.uk/news/business-10746025
    http://www.bbc.co.uk/news/business-10708737

    http://www.bbc.co.uk/news/business-10733851

    http://www.bbc.co.uk/news/business-10736727

    http://www.bbc.co.uk/news/10713376
    Even jockeys are getting a 10% pay rise.


    Phew. Well thank goodness the crisis is all over. Today has been a good day. I can cancel the order for market cornering wheat I put in and buy a new car, a house, that Maldives cruise I've had my eye on and buy some shares in the banks and BP. After all, I wouldn't want people to think I was poor.

    Nothing to see here, please move along. Isn't it about time we learnt to hug a bank and realise that everything is rosy in the English country garden?

    Or is it?

    http://www.bbc.co.uk/news/business-10729565

    http://www.bbc.co.uk/news/business-10736517

    http://news.bbc.co.uk/sport1/hi/football/teams/s/sheff_wed/8847626.stm

    http://www.bbc.co.uk/news/world-europe-10739152
    Fraud and corruption seems to be rife at the moment and so early into the recovery.

    http://www.bbc.co.uk/news/business-10737826
    http://www.bbc.co.uk/news/business-10730852
    In the summer? Isn't that the best time to sell a house? (I haven't researched that comment (it's late))

    http://www.bbc.co.uk/news/business-10739111
    A repeat link. Is the fact that Med holidays are cheep a good thing or just exposing other exposures?

    http://www.bbc.co.uk/news/business-10736126
    Glad I'm not flying from any of the mentioned airports. I wonder if there will be an impact upon my return!

    http://www.bbc.co.uk/news/world-africa-10735255
    Big business still acting amorally.

    http://www.bbc.co.uk/news/business-10732597
    7 banks fail a flimsy stress test. Urm.

    http://www.bbc.co.uk/news/entertainment-arts-10711711
    'Freeview'? 30 souvs to you gov.

    I make that 16 - 10.

    That's all on the one website in the one day (apologies for the limitations). So, how do you guys feel? Do you feel stimulated?

  • Comment number 56.

    Mr Peston (or anyone) - can you explain to me exactly who it is that we, like most Western countries, owe the money to? The total sum must run into squillions. Who or what holds that amount of money and is it taxed? Where does the Chancellor go with his bowl to ask for more? Is it all in Swiss banks? It would be nice to know who it is that we are indebted to.

 

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