European banks/Sovereign default
The results of the stress test were of course better than thought relative to the amount of banks ‘failing’ and the amount of total capital that needs to be raised in order to get every one of the 91 to a 6%+ tier one capital ratio. We can all debate whether the test was helpful or not since so many ‘passed’, whether sovereign debt was in the trading book or the banking book, etc… but the bottom line is the test was not truly stressed to the real worst case scenario, a sovereign default. If you’re in the camp that there is no way Greece defaults, then the results of the test can provide you with much clarity. If you’re in the camp that Greece will inevitably default and time is the only question, the stress tests have no meaning because all bets are off under a sovereign debt restructuring due to the huge sovereign debt cross holdings of a majority of the banks tested.
Tweet
Facebook
Reddit
Digg this!
July 23rd, 2010 at 5:33 pm
[...] line is the test was not truly stessed to the real worst case scenario, a sovereign default,” writes Miller Tabak’s Peter Boockvar. He says folks who believe there’s no way Greece or any [...]
July 23rd, 2010 at 9:09 pm
I thought that part of the plan was to release details of sovereign exposure by Bank so that the market could re-evaluate according to its own various assumptions? This would be more helpful. Also, would it not have been better to announce in short orrder a plan for how to fix the (Now very limited) number of Banks iwth problems? Can we expect to see a run on these Banks when they open Monday?
July 23rd, 2010 at 9:44 pm
And if, by chance, the market in its infinite wisdom decides to move on after this, where next? Sovereign debt levels in the EU AND THE US average 80-90% of GDP whereas those in Japan are in excess of 250%. Yet the Yen has continued to gain and is even discussed as a “Safe haven”. What gives?