Monday, July 11, 2011

Ernst & Young warn that Europe's bank stress tests will not restore market confidence

Thanks to an article in the Telegraph, we know that Ernst & Young supports the arguments and conclusions put forth on this blog when it comes to Europe's stress tests.

Specifically, Ernst & Young supports the prediction under the FDR Framework that the only part of the stress tests that is likely to impact confidence is the disclosure of data and that this impact occurs because market participants can analyze this data and draw their own conclusions.
The European Banking Authority will publish the results to its second set of stress tests on Friday but the tests' credibility has already been called into doubt by the Ernst &Young Financial Services Eurozone Forecast. 
"Crucially, the adverse scenario still does not consider a European sovereign debt default. Moreover, the methodology overlooks the potential for damaging feedback loops to develop between banks and the broader economy at times of financial stress," the forecaster said. 
"We believe that the EU stress tests results will not significantly dampen risk aversion in wholesale funding markets." 
... The second round of stress tests, which are being conducted after the first set were completely discredited by the clean bill of health for Ireland's banks, were supposed to shore up confidence. However, the forecaster said: "It seems unlikely that the results will drive a wide-scale recapitalisation of southern banking systems that would help to assuage investors." 
One hope, however, is that the increased level of detail the lenders will publish will reduce uncertainty. "Banks will be required to disclose more details about the size of their exposures, which will help market participants to calculate the effect of larger stresses for themselves," the report said. 
"So while we believe the stress test results themselves are unlikely to dampen risk aversion significantly in the funding markets, enhanced clarity regarding the positions of banks should contribute toward reducing uncertainty." 

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