Who do the Europeans think they are fooling with the bank stress tests?
Just seven banks from 91 tested failed the stress tests that were weaker than those administered to America’s 19 biggest banks in early 2009.
Ten US banks failed that test and had to raise $US45 billion in new capital, a move that helped end the slump in the stockmarket and the following rebound.
Now the Europeans are looking for a similar kick start to their troubled banking and financial sector.
But the seven failures only have to raise $US4.5 billion in new capital.
They should take a look at what has happened to the American banks that were not stress-tested, the thousands of small and medium sized operations that dot the American landscape.
For them, the slump hasn’t ended, although many are now back in profit.
Some 715 of America’s less than 8,000 banks are on a sick list overseen by the chief regulator, the FDIC, and some of them are failing weekly.
(Europe has a couple of thousand small state and privately-owned banks in and outside the eurozone that remain vulnerable).
Friday night in the US saw seven small local or regional banks closed (the largest had just over $US1 billion in assets) by regulators.
That took the total so far this year to 103, against 140 in 2009.
Adding in the failures from 2007 (3) and 2008 (25, including the biggest, Washington Mutual), a total of 271 US banks have been shut, with losses and costs to the taxpayer of more than $US50 billion at the moment.
The pace of failures in the US this year has been quicker than last year when the 100 failure mark wasn’t reached until October.
US regulators think failures will peak this quarter, but they have recently warned that the sluggish economy and continuing high level of joblessness might cause more failures than expected.
The banks seized on Friday were in Florida, Georgia, South Carolina, Kansas, Minnesota, Nevada and Oregon. Total cost to the taxpayer, $US431 million for the FDIC’s deposit insurance fund.
In Europe the seven, which include the German government-owned basket case, Hypo Real Estate (HRE) and Greece’s ATE, have to raise some $US4.5 billion in new capital.
Five of Spain’s smaller regional lenders, known as cajas, failed the test.
Another five banks had what were called ‘near misses’ in that their capital levels were considered to be barely adequate, so they may have to raise more money.
Banks that came close to failing with a Tier 1 ratio of less than 7% under the most stressed scenario included Germany’s Deutsche Postbank, Greece’s Piraeus, Allied Irish Banks (in government hands), Italy’s UBI Banca and Spain’s Bankinter.
All newsagency reports carried comments critical of the tests by commentators and analysts from the markets.
But perhaps the most telling report came on Reuters which said that US investors had already sold down their European bank holdings in 2008 and 2009.
"U.S. mutual funds cut their holdings of publicly traded European banks identified in the tests to just $US12.1 billion from $US29.8 billion, a whopping 59.2 percent decline in the last two years through May, according to Lipper, a Thomson Reuters company, " Reuters reported at the weekend.
Assuming that the shares were sold back to European investors, it means there has been a concentration of risk on the equities side in Europe at the same time as the European banking system lost ratings, reputation and increased its risk profile.
And why does this matter in Australia?
Because it will be examined by the Reserve Bank in the lead up to its board meeting tomorrow week to discuss interested rates (see the first story).
