Stress tests say that almost all banks in Europe are healthy, but...
Friday, July 23, 2010
, Posted by Usman Ali Minhas at 11:39 AM
The results of the 2010 EU-Wide Stress Testing Exercise has been released today with some news on the board. 7 of the 91 banks tested has failed the test, with a necessity of global EUR 3.5 billion extra capital in case of continuing crisis until end of 2011. In case of sovereign shock, the aggregate lost to the whole testing could be of EUR 67.2 billion.
According to the Committee of European Banking Supervisors and national authorities across the European Union, the seven banks that have failed the test are Banca Civica, Unim, Espiga, Diada and Cajasur from Spain, ATEBAN from Greece and German HYPO. French, Portuguese, Italian, Finnish, Swedish and Belgium top banks all passed.
"After a long awaited report, the stress test is here, showing that only 7 out of 91 banks fail the tests and need capital injections, of around 3.5B," Said Valeria Bednarik, Fxstreet.com collaborator. "The uncertainty over the metrics used to perform the test, that had generated uncertainty over the past two weeks, are not over: Investors seem to be worried that the stress tests still excludes the possibility of a sovereign default of a sovereign default as the data is based mostly on trading portfolios information when much of sovereign debt is held outside those portfolios," Bednarik states.
The Euro has been shaken by the stress release, the EUR/USD rose quickly before reportfrom daily low at 1.2790 to test 1.2900 and get back to 1.2800 again after stress releases. Currently the pair is trading around 1.2820/40. EUR/JPY lost 110 pips after results and the EUR/GBP avoid its recovery from 0.8315, 1-week low, at 0.8360 to price back around 0.8330.
With a disappointing market reaction, is clear the fact that the stress tests could be underestimating possible losses by excluding the risk of a sovereign default and could undermine their credibility as indicators of the financial health of European banks.
"To trust or not to trust is now the question," affirms Valeria Bednarik. "Does these results are enough to restore confidence in the EU banking systems? Or on contrary, they are highlighting the problems that the banks have?" Ask Bednarik and she concludes: "Guess just one thing is clear right now that is, stress test FAILED: price action and stocks movements are far from reflecting confidence."
