Dr. Trichet's Banking Lab. Post Mortem. Rating Agencies

Most European Banks Pass The Stress Test, But Capital Concerns Persist: "

Standard & Poor's Ratings Services does not currently expect to revise any of its ratings based on the release of the results of the European Banking Authority's (EBA) stress tests on European banks. Most of the 90 participating banks passed the tests, which we had expected in view of significant capital raising by the banks since the financial crisis and the modest macroeconomic downturn assumed by the EBA.

We consider the EBA's stress test assumptions to be akin to a 'BB' stress scenario under our rating methodology. It is therefore not unexpected that the stress test results are relatively favorable. In our rating analysis, we routinely assess the resilience of banks' capitalization to more substantial stress events through our risk-adjusted capital ratios. The risk-weights and capital charges incorporated in our risk-adjusted capital framework assess the potential impact of a mid-single-digit percentage point decline in GDP over three years in mature economies. In addition, we have undertaken periodic analyses of more severe scenarios. These "what-if" scenarios are not the central expectation on which we base our ratings, but simulate potential downside risks. Our conclusion from this work is that, although the sector undoubtedly appears to have improved its position since the financial crisis, capital remains a neutral or a negative rating factor for most European banks. We expect that the stress test process is likely to add further impetus to banks' capital raising efforts in the lead-up to the implementation of Basel III.

Rather than the simple pass/fail outcome, we consider that the most informative aspect of the EBA's stress test process is the release of risk exposure data. This information is much more granular than the disclosures typically found in banks' regular reporting. We will continue to analyze these figures and expect the outcome of our analysis to support the conclusions we have reached with our risk-adjusted capital ratios.

 

                                                                   Overview

• We do not currently expect to take rating actions on the basis of the information disclosed in the European bank stress test results published on July 15, 2011.


• Through our risk-adjusted capital framework, we routinely assess the resilience of rated banks' capitalization to more substantial stress events than the moderate downturn scenario used in the EBA's stress tests.


• Although the sector undoubtedly appears to have improved its position since the financial crisis, we continue to believe that capital remains a neutral or a negative rating factor for most European banks.


• We consider that the European bank stress tests did not fully capture key rating factors such as the potential implications of a sovereign default or banks' funding imbalances.

In our view, the value of stress testing exercises stems from the credibility of the underlying assumptions. Having reviewed the stress test results, we remain of the view that the exercise was an improvement on the equivalent process undertaken last year, but could usefully have been more challenging in terms of the severity of the economic and market assumptions. For example, the EBA's adverse scenario assumed a 0.4% contraction in real GDP in the EU as a whole in 2011-2012. Although this is well below consensus expectations, we consider that a moderately harsher scenario would have added greater value in terms of assessing the resilience of the sector.
The results of the stress test vary considerably across the sector, and this variance is in line with the large gap seen in our ratings on the banks with the strongest and weakest creditworthiness. Sovereign support remains an important rating factor for many European banks. For example, the EBA reported that, of the €1 trillion of core Tier 1 capital held by the 90 stress tested banks at year-end 2010, 16% had been provided by governments or other public sector entities. Equally, indebted governments rely to a material extent on their domestic banks to fund their deficits, as illustrated by the data on banks' sovereign exposures. The unwinding of this interdependency is likely to be difficult and take an extended period of time. In our view, the potential implications of a sovereign default or restructuring on the banking sector were not fully considered in the EBA's stress tests.

Other than higher funding costs, which had a material impact on the results, the stress test process did not consider banks' funding and liquidity positions. We consider that the major challenges facing European banks are their ability to access public funding markets, reduce their dependence on central bank money, and strengthen their liquidity buffers. These issues will have a material impact on the sector's growth and earnings potential in the coming years. The EBA has stated that it has conducted reviews of European banks' liquidity positions, but will not publish the findings."

                                                                 ( Standard & Poors )
What is the Take Away ..?


The European Banks are tested Essentially for the ' Milder ' Adverse Economic Scenario than the Implied by the Ground Circumstance. Where the Capital is inter-dependent between Banks and Or Government, the Effects are not replicated. I.e. the Impact Value should be doubled or given to that Factor. 


In Short, the Data is not analysed to the Logical Extent, but is Validated superficially.


DR.Trichet your lab has smooth wheel Under the " Running Wheels" ?