No cheating, children.
With the euro banging around $1.30, it would appear, for the moment certainly, that the broad market has decided to put the stress tests of European banks behind it. Look, stocks got the answer they wanted: 91 banks tested, 84 found not wanting. Those are numbers only a risk trader could love. All those questions about veracity and credibility, well, leave them to somebody else.
The tests were widely panned, but they did provide one valuable asset: data. The tests amounted to a giant data dump, in that banks’ asset sheets were published (more or less, some more, some less) for all to see. What’s valuable about that is it lets anybody who wants to, conduct their own stress test.
“The market is doing its own stress test calculations and coming up with radically different answers,” Richard Smith writes at naked capitalism. JP Morgan’s Pavan Wadhwa, for one thing, estimates 54 of the banks would’ve failed had the tests been more stringent (I don’t have the original report myself, but I’m working on getting a copy) with a capital shortfall of about 60-75 billion euros, far higher than the 3.5 billion shortfall as calculated by the official tests.
Separately, Citigroup said 24 banks would’ve failed if the tests had included assets the banks were holding to maturity, Bloomberg reported. That was one of the biggest complaints, that the tests included only trading assets, which comprise a far smaller percentage of total assets.
Then there’s Nouriel Roubini, who just flatly said the tests weren’t realistic.
There will likely be more of this in the days, weeks and even months ahead. I’ll be interested to see if Chris Whalen and the crew at Institutional Risk Analyst digs in there. I know he said they don’t matter, but somehow I think a data hound like Whalen won’t be able to resist.
Listen, just keep this in mind: all these stress tests, on both sides of the pond, are for show purposes only. As per Ambrose-Evans Pritchard over at the Telegraph, they were an “operation to calm the markets,” in the words of one German regulator.
All the banks, and all the sovereigns, are constantly being tested by the only criteria that matters, reality. U.S. banks failed that test miserably in 2008. It remains to be seen how European banks will fare, as their test is ongoing, but the fact that the Europens had to cobble together a 1 trillion euro bailout plan for the entire Continent is not a good sign.