Thursday, December 8, 2011

Europe's bank supervises raises the amount of capital Europe's banks need

An article by Harry Wilson in the Telegraph documents regulators demonstrably creating financial instability.

This is not the first time, but I am always surprised when regulators knowingly choose to create financial instability.

Greek banks have been told they must find an additional €30bn of Core Tier 1 capital to bolster their ability to withstand losses, while Spanish lenders will have to raise a further €26.2bn to meet Europe's new capital standards. 
In Germany there was upset as the European Banking Authority said the country's banks needed to raise €13.1bn, with senior bankers branding the process "chaotic" and saying it would exacerbate the financial system's problems. 
"The stress test hasn't contributed to market stabilisation. The lengthy and seemingly chaotic process has also strengthened the impression that every result is possible," said Michael Kemmer, head of the BdB association of German banks.
I know I am repeating myself, but the only way for the stress test to contribute to market stabilization is if they are accompanied by utter transparency by the banks.

It is only with each bank disclosing its current asset, liability and off-balance sheet exposure details that market participants can independently verify the results of the stress tests.

Without the ability independently verify, market participants simply see the stress tests as an implied guarantee by the government.  After all, how can the government not bailout investors if the regulators say the bank is solvent.

Unfortunately, this implied guarantee loses its value when the sovereign itself is seen as needing to be bailed out.
British banks again passed the tests without having to raise additional capital with all four main lenders involved exceeding the 9pc minimum Core Tier 1 capital requirement imposed by the EBA. 
Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland said they would be making no additional call on shareholders to meet the standard, which banks are required to achieve by next July....
Please don't tell the Telegraph's Ambrose Evans-Pritchard this as he thinks these banks are insolvent.  By definition, insolvent banks need to increase their capital.
Although the EBA has been frequently criticised for not being hard enough on banks, it insisted it did not want to force lenders into a destructive spiral of asset sales in order to meet its new capital requirements. 
Which makes me wonder why they offered up the idea that banks need additional capital in the first place.
"Both national supervisors and the EBA will seek to ensure that the actions taken to comply with the requirements do not lead to significant constraints on the credit flow to the real economy," said the EBA in a joint statement with the Economic and Financial Affairs Council (Ecofin). 
Why do I not find that very re-assuring?  Could it be because a credit crunch has already started in Europe?
European bank deleveraging has been seen as a major threat to the stability of not just Europe, but the global financial system. 
A report published on Thursday by Deloitte estimated that total banking system disposals could reach in excess of €1.7 trillion, an amount equal to the size of the British economy. 
Analysts at US investment bank Morgan Stanley have warned that deleveraging by European banks will be one of the main themes driving markets next year as lenders look to sell off non-core and non-performing assets to strengthen their balance sheets. 

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