Subscribe: RSS Feed | Twitter | Facebook | Email
Home | Contact Us

European Bank Stress Tests Confirmed as Shams

Posted by Larry Doyle on September 7, 2010 6:53 AM |

I have long since given up the belief that our government officials and financial regulators will demand real transparency and full disclosure in the pursuit of unquestioned integrity across our economic landscape. While some may deem me overly cynical for that statement, too much proof and too many situations leave me no other choice. Where do we witness more financial artifice this morning? Let’s look across the pond.

In late July, I questioned the integrity of the European Bank Stress Tests and wrote, Will European Bank Stress Tests Be “Garbage In, Garbage Out?”:

All eyes will turn toward Europe this afternoon for the much anticipated release of the Euro-style Bank Stress Tests. Those who truly embrace real ’sense on cents’ know that the process and the data are far more important than the actual results. Why is that? If these tests are charades or nothing more than ‘garbage in,’ then the results will most assuredly be ‘garbage out.’

Well, while gullible investors and government officials worldwide may not care to know the real state of the European banks, those of us who truly treasure ‘sense on cents’ are not surprised to now see European financial sewage streaming across the newswire.

We did not have to wait all that long to learn from The Wall Street Journal, Europe’s Bank Stress Tests Minimized Debt Risk:

Europe’s recent “stress tests” of the strength of major banks understated some lenders’ holdings of potentially risky government debt, a Wall Street Journal analysis shows.

As part of the tests, 91 of Europe’s largest banks were required to reveal how much government debt from European countries they held on their balance sheets. Regulators said the figures showed banks’ total holdings of that debt as of March 31.

At the time, worries about banks’ government-debt holdings were fanning fears about the health of Europe’s banking system as a whole. Release of the bank data was considered the main benefit of the stress tests, which were widely criticized as being lenient overall.

An examination of the banks’ disclosures indicates that some banks didn’t provide as comprehensive a picture of their government-debt holdings as regulators claimed. Some banks excluded certain bonds, and many reduced the sums to account for “short” positions they held—facts that neither regulators nor most banks disclosed when the test results were published in late July.

Because of the limited nature of most banks’ disclosures, it is impossible to gauge the number of banks that excluded portions of their sovereign portfolios from their disclosures, or the overall effect of that practice.

[EUSTRESS]

But the exposure to government debt of at least some banks, such as Barclays PLC and Crédit Agricole SA, was reduced by a significant amount, according to industry officials and financial filings made by the banks. Adding to the haziness, the stress tests’ reported sovereign-debt levels differed, sometimes widely, from other international tallies and from some banks’ own financial statements.

The findings undermine a primary goal of the stress tests—namely, to reassure investors and bankers world-wide the soundness of Europe’s financial system. “That would certainly be unhelpful to people’s perceptions” of the tests’ credibility, said UBS banking analyst Alastair Ryan. Reducing banks’ reported holdings of government debt “was clearly helpful for the thing [regulators] were trying to achieve: convincing you that there’s not a problem.”

Representatives of several banks said they were simply following the guidance provided by the Committee of European Banking Supervisors, the London-based group that coordinated the tests. A CEBS spokeswoman declined to comment.

Simply following the guidance? Oh, is that how this works? Where might they have learned that trick? Can anybody say Tim Geithner? Anybody, anybody,…Bueller?

Garbage in, garbage out!!

Call me cynical if you want, but I have this soft spot in my heart for a little item known as the truth.

Larry Doyle

Please subscribe to all my work via e-mail, an RSS feed, on Twitter or Facebook.

I have no affiliation or business interest with any entity referenced in this commentary. As President of Greenwich Investment Management, an SEC regulated privately held registered investment adviser, I am merely a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • Lou

    In true Jack Nicholson fashion,

    “You want the truth? You can’t handle the truth!!”

  • Victor

    Why is it that this comes out now and not when the results were released? What a farce. No wonder why there is such little confidence in the markets, the regulators, and governmetn officials.

  • Franz

    Why so harsh? Don’t the U.S banks have lots of the same problems?

  • Franz

    Why so harsh? Don’t the U.S banks have some of the same issues?

    • fred

      Franz,

      Two wrongs, don’t make it right.

      • fred

        US treasuries are considered tier 1 capital for all banks. Treasuries are serviced in $US (Federal Reserve Notes).

        Currently, 2/3 of the Feds balance sheet is mtg backed securities whose value has yet to be reduced by either interest rate risk (prepayment) or default risk (nonpayment).

        The backstop for the Fed’s balance sheet is tax receipts which have already been more than fully earmarked for social security, healthcare, defense and gov’t administration.

  • divvytrader

    All the Euros back in the office from August holiday have alot of Greek bonds to unload …..even with ECB buying from them , the 10yr benchmark in the $68’s ….new low since ECB buying drove up the price to $93+ ….. i figger new Greek riots by end of month should make for great gnashing of teeth on CNBC as stocks go lower .

    • Franz

      Americans should just wait until these issues come ashore over there. You may be bigger but the issues are the same…DEBT KILLS!!

  • It seems to me many of the developed countries have the same debt problem. I found an interesting article the other day on government debt, and touches on the importance for counties to develop long-term debt reduction plans.

    Cade






Recent Posts


ECONOMIC ALL-STARS


Archives