Comprehensive Assessment, Asset Quality Review, Stress Tests. How many times have we heard or uttered these three terms over the past 15 months? They’ve easily been among the single biggest terms in banking over the past year or so, certainly in Europe.
And now we finally have the results. You’ve all seen them, so I’m not going to be the 1,000th source to weigh in with a detailed review of who passed and who failed. Short version: it was all a bit of a snore. The ones who failed were already duds; we knew that. No-one ‘significant’ failed. And even many of those that did have done stuff since the end of last year to get them over the line.
A capital deficit of €7bn to €10bn, depending on who you include as credible and how you read the results, is negligible. Forced changes to asset values were similarly unremarkable, even for illiquid Level 3 assets.
There were signals of palpable relief contained in the press releases of some banks that were clearly cock-a-hoop at having passed. Here’s the question, though: were the tests credible? There’s no way of answering that because at the end of the day it’s not about whether you agreed with the methodology, whether the minutiae of the macro and other inputs (including inflation numbers) were believable; whether banks or regulators really know the true extent of existing non-performing loans or other exposures or whether NPL and reserving policies are on the button or way wide of the mark.
It’s a question of whether you believe ultimately that the tests prove or not that the eurozone banking sector is sufficiently strong to withstand a shock of the proportions envisaged by the technocrats prepping the tests. Or worse. Or indeed whether you believe it’s about the quantum of capital in the first place.
We just don’t know as it’s as much to do with the resolution apparatus and process, the nature and provenance of any shock that does emerge, whether the new-fangled Additional Tier 1 and other capital instruments that banks have actively been issuing all year end up doing their job, and whether regulators are on the ball and have the balls to force bail-in and risk unleashing a systemic crisis by their own hand. This issue is as much political as economic.
Ask yourself this: did you feel any differently when you saw the results emerge on Sunday than you did when you retired for the night on Saturday? Did anyone actually stay up to see the results live? (I bet some of you did …) Did you breathe a sigh of relief in an ostentatious exhalation? Be honest: you didn’t did you? Do you believe, as smart-ass EZ policymakers did, that the banking crisis is behind us? You don’t, do you?
In truth, the remedial measures put into place since the tests were announced last year may provided a fair degree of comfort that the results merely backed up. But despite the overblown relief rally in banking stocks, I don’t think anything has fundamentally changed.
“We do not believe that the adjustments identified and capital shortfalls are credible at the end of a 70-year debt cycle,” said Berenberg Bank’s killjoy bank analysts. ”The lack of clear next steps from the ECB/EBA and some of the responses of the competent national authorities further undermine credibility. The bank rally will likely splutter on for a while yet, but with the structural problems still unrecognised and unresolved, it will not be sustained”. Oh dear …
“The AQR/ Stress Test was never meant to be the solution to all of Europe’s woes, but this still gives the impression of being a relatively lightweight exercise,” according to SG’s bank analysts. “Overall the market must now move on to the bigger problems of credit demand and the lingering prospect of deflation – which will take more determined efforts from governments to fix.”
Ultimately, that’s the point in all of this. Banking sector robustness is merely a starting point; policymakers now need to find a way of getting the banks to engage in the business of banking without undermining their capital strength. In that endeavour, they’ve created a massive conundrum for themselves.
But here’s my parting salvo for today: as much as the focus was on banks that failed or barely passed, I’m as much interested in banks that on the basis of the minimum pass mark were rampantly over-capitalised.
I know we’re heading towards silly levels of total capital under TLAC – although we’ll need to wait until FSB in Brisbane to get full visibility on that – but I think moves to increase total capital levels and this capital arms race is counter-productive.
To those banks sitting on fluffy cushions of excess capital, I say release it and do something constructive – buy something with it or lend it. You never know, you might like it.
