Remarkably sanguine: That's the tone of the research notes still coming out from analysts in Europe as they peruse the data released Friday by the Committee of European Banking Supervisors.
"The test represents a substantial step forward," a team of Goldman Sachs analysts led by Jernej Omahen wrote Monday in a note.
While the simulations assumed a Tier 1 capital ratio of 6 percent, the report published "provides market participants with sufficient information to locate capital shortfalls against the capital ratio of their choosing," the Goldman analysts said.
Raising the ratio from 6 percent to 7, for example, more than triples the number of banks that do not pass from 7 to 24, out of 91 banks surveyed, the analysts said.
Or take, for example, how the banks hold sovereign debt. According to a Morgan Stanley survey published last week, about 90 percent of the sovereign debt held by the banks in question is not on their trading books, where they would mark the securities to market, but on their banking books, where they don't, as they plan to hold the notes to maturity and see their principle paid back in full.
Marking to market could push the value of the assets down in the interim, reducing the banks' capital and increasing the funds they would have to raise to satisfy financial regulators. But once again, the report provides enough information for those who disagree to recalculate bank losses based on other assumptions.
Goldman ran the numbers on the sovereign on the banking book as well, and concluded that banks would take an additional hit of 65 billion euros, or $84 billion, after taxes, raising the number of failed banks from 7 to 21 even at a Tier 1 of 6 percent.
In another report released Monday, Barclays said that the stress tests seemed to be aimed less at equity markets, since many of the European banks tested are not publicly listed, but at buyers in debt markets, where sovereign wealth funds and Asian central banks play a major role. Barclays Capital analysts predicted the stress test results would receive a "cautious welcome."
Some analysts questioned the wisdom of further investments from Asia.
"Asia has an enormous and expanding middle class that is striving for a better standard of living," Bruce Packard, an analyst at Seymour Pierce, wrote in a note. "We can’t help feeling that these people have better things to do with their savings than lending to the Western European banking system, in order for the European banks to then lend the money on to aging European populations, to speculate in residential property.”
He also expressed surprise that the debt markets had ignored the problem for so long.
"The way debt investors suddenly realized there was a huge credit bubble made me think that the way their market works is not particularly efficient," Mr. Packard said in an interview.
But Barclays sees a larger problem: banks trying to recapitalize have needs that surpass the willingness of investors to sink more money into the sector.
"While systemic risk has probably been reduced, little has altered the structural funding challenges facing European banks — too many balance sheets chasing too few funds," the bank said in a brief note.
Still, Barclays saw justification in the stress tests' assumptions, saying "Given that the European stress test was conducted after a deep recession, the severity of the stressed downturn was always going to be much more modest than that used in the U.S. stress test."
Overall, the published results may work towards improving confidence in European banking, as regulators, lenders and governments on the subcontinent had hoped.
"This should help the ongoing gradual healing process of the European financial system (including for interbank) — which, obviously, is also being helped by the robust numbers from the macro side," Erik F. Nielsen, chief economist at Goldman, said in a separate note Monday.
–Chris V. Nicholson
E-mail This Print Share Close Linkedin Digg Facebook Mixx My Space new_york_times:http://dealbook.blogs.nytimes.com/2010/07/26/digesting-the-stress-tests-with-approval/ Permalink Financial Services, Investment Banking, Barclays, Committee of European Banking Supervisors, Goldman Sachs, Morgan Stanley Related Posts From DealBook JPMorgan’s Dimon Not Invited to U.S. Bill SigningTough Stretch Causes Poor 2nd Quarter at GoldmanMortgage Investor Sues 15 Banks Over SubprimeIn London, Banks Begin to Hire AgainCuomo and the Broad Power of the Martin Act Previous post Martin Currie Said to Launch Retail Funds Next post Divorce of Hedge Fund Power Couple Shakes Ikos NYTD.CRNR.userContent.getUserContent(25,'default'); Latest DealBook Headlines Come Blow Your Horn to the S.E.C. // New Report Asks: ‘Private Equity, Public Loss?’ // Morning Take-Out // Accel-KKR Sells iTradeNetwork for $525 Million // SKS Microfinance May Raise $344 Million in I.P.O. // DealBook News by Industry Airlines / Autos Basic Industries Consumer Goods Energy / Utilities Financial Services Food & Beverage Healthcare Media Real Estate Retail / Leisure Technology Telecom Contributors Andrew Ross Sorkin Editor Posts | Profile Jack Lynch News Editor Posts Michael de la Merced Reporter Posts | Profile Cyrus Sanati Contributing Reporter Posts Steven M. Davidoff The Deal Professor Posts | E-mail Peter J. Henning White Collar Watch Posts Liza Klaussmann Overnight News Editor Posts Chris V. Nicholson European News Editor Posts Home World U.S. N.Y. / Region Business Technology Science Health Sports Opinion Arts Style Travel Jobs Real Estate Autos Back to Top Copyright 2010 The New York Times Company Privacy Terms of Service Search Corrections RSS First Look Help Contact Us Work for Us Advertise Site Map var gtrackevents=false; if (typeof NYTD.Blogs.user != 'undefined') { if(NYTRemarkably sanguine: That's the tone of the research notes still coming out from analysts in Europe as they peruse the data released Friday by the Committee of European Banking Supervisors.
"The test represents a substantial step forward," a team of Goldman Sachs analysts led by Jernej Omahen wrote Monday in a note.
While the simulations assumed a Tier 1 capital ratio of 6 percent, the report published "provides market participants with sufficient information to locate capital shortfalls against the capital ratio of their choosing," the Goldman analysts said.
Raising the ratio from 6 percent to 7, for example, more than triples the number of banks that do not pass from 7 to 24, out of 91 banks surveyed, the analysts said.
Or take, for example, how the banks hold sovereign debt. According to a Morgan Stanley survey published last week, about 90 percent of the sovereign debt held by the banks in question is not on their trading books, where they would mark the securities to market, but on their banking books, where they don't, as they plan to hold the notes to maturity and see their principle paid back in full.
Marking to market could push the value of the assets down in the interim, reducing the banks' capital and increasing the funds they would have to raise to satisfy financial regulators. But once again, the report provides enough information for those who disagree to recalculate bank losses based on other assumptions.
Goldman ran the numbers on the sovereign on the banking book as well, and concluded that banks would take an additional hit of 65 billion euros, or $84 billion, after taxes, raising the number of failed banks from 7 to 21 even at a Tier 1 of 6 percent.
In another report released Monday, Barclays said that the stress tests seemed to be aimed less at equity markets, since many of the European banks tested are not publicly listed, but at buyers in debt markets, where sovereign wealth funds and Asian central banks play a major role. Barclays Capital analysts predicted the stress test results would receive a "cautious welcome."
Some analysts questioned the wisdom of further investments from Asia.
"Asia has an enormous and expanding middle class that is striving for a better standard of living," Bruce Packard, an analyst at Seymour Pierce, wrote in a note. "We can’t help feeling that these people have better things to do with their savings than lending to the Western European banking system, in order for the European banks to then lend the money on to aging European populations, to speculate in residential property.”
He also expressed surprise that the debt markets had ignored the problem for so long.
"The way debt investors suddenly realized there was a huge credit bubble made me think that the way their market works is not particularly efficient," Mr. Packard said in an interview.
But Barclays sees a larger problem: banks trying to recapitalize have needs that surpass the willingness of investors to sink more money into the sector.
"While systemic risk has probably been reduced, little has altered the structural funding challenges facing European banks — too many balance sheets chasing too few funds," the bank said in a brief note.
Still, Barclays saw justification in the stress tests' assumptions, saying "Given that the European stress test was conducted after a deep recession, the severity of the stressed downturn was always going to be much more modest than that used in the U.S. stress test."
Overall, the published results may work towards improving confidence in European banking, as regulators, lenders and governments on the subcontinent had hoped.
"This should help the ongoing gradual healing process of the European financial system (including for interbank) — which, obviously, is also being helped by the robust numbers from the macro side," Erik F. Nielsen, chief economist at Goldman, said in a separate note Monday.
–Chris V. Nicholson
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