Courtesy of Mish.
The EBA’s latest “Stress-Free” tests of 51 banks Eurozone have a minuscule overall capital shortfall of 5.6 billion euros.
A ZEW study using more reasonable stress test measures concluded something much different.
According to ZEW, capital shortfalls of publicly listed banks in a market-based stress test totaled 675 billion euros.
Crédit Agricole, BNP Paribas, and Deutsche Bank were the worst of the lot.
German and French Banks Have Massive Capital Shortfalls
Inquiring minds are investigation the ZEW report Stress Scenarios Reveal Capital Shortfalls in EU Banking Sector.
European banks lack sufficient capital to offset the losses expected in the case of another financial crisis. Quite how big losses are depends, however, on the stress level to which banks are subject. A recent study carried out by Sascha Steffen (Centre for European Economic Research (ZEW) and University of Mannheim) together with Viral Acharya (New York University Stern School of Business) and Diane Pierret (University of Lausanne) has considered results from the latest round of stress tests carried out for European banks. The study shows that the measured capital shortfalls differ to the extent of billions according to the stress scenario and the stress test methodology used. In particular, substantial differences are seen for banks in France, the United Kingdom, in Germany, Spain and Italy.
The researchers based their comparison on two benchmark methodologies; the approach taken by the European Banking Authority (EBA) in stress tests conducted in 2014, and the approach used by the US Federal Reserve (Fed) in the stress test conducted in the US banking sector in 2016 (CCAR 2016). Building on assumptions made in the EBA and Fed stress tests, researchers used a third, market-based approach, which assumed a global stock market decline of 40 per cent over six months. As in the EBA stress test conducted in 2016, the study considered 51 European banks, 34 of which are publicly listed.
German and French Banks Have the Largest Capital Shortfalls
Under the EBA methodology, the capital shortfalls of all 51 banks totalled 5.6 billion euros. The CCAR 2016 approach resulted in total capital shortfalls of 123 billion euros for all 51 banks. The banks with the largest capital shortfalls are the Deutsche Bank (19 billion euros), and the French banks, Société Générale (13 billion euros) and BNP Paribas (10 billion euros).
If the 34 publicly listed banks are considered, the differences between measured capital shortfalls are even more stark. Capital shortfalls of the publicly listed banks in the market-based approach totalled 675 billion euros, whilst the Fed stress test revealed shortfalls of 92 billion euros. The banks with the largest capital shortfalls were the French banks, Crédit Agricole (79 billion euros) and BNP Paribas (75 billion euros), and the Deutsche Bank (60 billion euros).
Main Objective: Lie
“The main objective of the recent EBA stress test was to achieve transparency in regard to bank capital adequacy in stress scenarios, not to reveal capital shortfalls that need to be taken care of immediately,” explains Professor Sascha Steffen, head of the ZEW Research Department “International Finance and Financial Management” and co-author of the study.
