Analysts talk of bank 'whitewash' but see no 'skeletons'

23rd July 2010, Comments 0 comments

Banking regulators published "stress tests" on 91 European banks accounting for 65 percent of EU banking on Friday, finding that seven failed and must raise extra capital to survive a new crisis.

A crucial question for the financial sector is the rigour, and therefore credibility, of the way the crash criteria were set for the banks. Here are some comments from financial analysts.

VTB Capital economist Neil MacKinnon:

"In the end, the stress tests do not seem that stressful.

"It looks like a whitewash and the initial reaction is one of scepticism on the part of the markets."

Mark O'Sullivan, director of dealing at foreign exchange firm Currencies Direct:

"What seems to have occurred is a compromise amongst European banking regulators, with many questioning if the bar had been set way too low in testing the European banking sector.

"It seems the tests may have raised more questions than they have answered and in the coming weeks it will be the interbank lending markets that will have the real answer as to whether real confidence has returned to the European banks."

GFT analyst David Morrison:

"Seven banks have failed -- five Spanish, one German and one Greek.

"The Eurocrat spin-machine has been working in overdrive all week. The market has been pricing in the "Goldilocks Scenario" -- not too hot, not too cold.

"In other words, just enough failures to make the test methodology credible, but not enough to rattle investors.

"But will seven failures out of 91 be enough for the cynics?"

He added: "Comparisons with the US stress test back in March 2009 are fairly spurious." This was because in the US "the downside was limited and the authorities threw the kitchen sink at the problem ... 15 months on, European banks remain overleveraged and we now have a sovereign debt crisis to consider."

Nikos Skourias, chief investment officer at Athens-based brokers Pegasus:

"The criteria were rather lenient, the results were to be expected.

"If you set easy questions in an exam, you get high success rates."

Chris Turner, ING bank:

"This outcome was pretty much in line with expectations and the Committee of European Banking Supervisors appears to have delivered reasonably rigorous methodology in an attempt to instill confidence.

"What can be said is that today's stress test release does not appear to have uncovered any skeletons in the closet'. Whether it goes far enough remains to be seen."

Jennifer McKeown, senior European economist at Capital Economics:

"On the face of it, the results of the EU bank stress tests would seem to be fairly positive, but worries that the tests were not demanding enough will persist.

"Any positive impact on sentiment will be limited by the fact that the tests were not particularly stringent. The 'adverse' economic scenario incorporated a return to only a very mild recession next year. What's more, the prospect of an outright sovereign default, which is what has worried markets most, has not even been considered."

Stephen Lyons, Emer Lang, Davy Research:

"The disclosure of sovereign holding will allow markets to do their own analysis. This enhanced disclosure should ultimately help to improve banks' access to wholsesale funding."

© 2010 AFP

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