Posts by "ridenredeem"

[big]

Good evening Mr Ashraf, (spore time)

is this call still valid on USDCAD as its seems to me v bullish.

Thanks

In Thread: Commodity FX (CAD AUD NZD NOK)

1.0338 and counting USDCAD

Ashraf

ANALYSIS





Stress-Test Success Requires Some Banks To Fail

By SIMON KENNEDY


LONDON -- A string of banks failing the European Union's stress tests could be one of the strongest signs the process has been a success, but analysts fear the tests could end up a big disappointment, offering too little information to boost confidence.

With much of the detail about how the tests are being conducted remaining fuzzy at best, failures could be taken as a sign that regulators have factored in significant potential losses from another economic downturn.

"The market's knee-jerk reaction will be that if very few banks fail, then it has not been a stressful enough test," Nomura analyst Jon Peace said.

The problem is that a steady drip of leaks and optimistic predictions from lenders, central bankers and politicians all suggest that the vast majority of banks in even the most troubled economies are likely to pass, he added.

In recent days, Luxembourg Prime Minister Jean-Claude Juncker, French Finance Minister Christine Lagarde, Greek Finance Minister George Papaconstantinou, Irish central bank governor Patrick Honohan and his Italian counterpart Mario Draghi are just a few of the officials to express confidence that their banks will pass the tests.

"There are very few left to fail," Peace said.

One of the few banks that will reportedly fail the test is German commercial property lender Hypo Real Estate, which is already state-owned after a bailout and has access to further government support.

None of the other 13 German banks being tested is expected to fail, despite the country's state-owned Landesbanken being seen as some of the weakest in Europe.

Lenient treatment

The results will be published--both on an aggregated and on a bank-by-bank basis--by the Committee of European Banking Supervisors and national regulators Friday, scheduled for 1600 GMT after European markets have closed.

The key measure for determining which of the 91 banks fail the test--and need to raise capital--is whether their Tier 1 capital ratio would fall below 6% under the loss assumptions imposed by the test.

That's the same level that was required in the stress tests of U.S. banks, though it could be where the similarities between the two will end.

Alessandro Roccati, director at Macquarie Securities, said his firm has identified 11 banks that could need more capital, including Commerzbank (CBK.XE) and Deutsche Postbank (DPB.XE) in Germany, Sabadell in Spain and Banco Popolare (BP.MI) in Italy.

However, Macquarie expects "more lenient treatment" in the official test, which will hurt its credibility.

"Unlike in the United States, we believe that the EU stress test is unlikely to restore confidence and to underpin a strong share price rise," Roccati said.

He said the scenarios being used in the EU tests are "far from the worst case" and aren't likely to cover all trading and off-balance sheet assets. Even if the tests are tough enough and disclosure is good, there has been no clear indication of how banks would be forced to raise more cash, meaning capital raising efforts could stretch into next year.

Credit Suisse Group (CS), which isn't being tested because Switzerland isn't part of the EU but is undergoing separate Swiss stress testing, also effectively questioned the severity of the tests when Chief Financial Officer Renato Fassbind told journalists Thursday that stress tests performed by the Swiss regulator were "more than twice as severe" as their EU counterparts.

Sovereign Losses

One of the reasons so many banks are expected to pass is because of the way the tests model potential losses on sovereign bonds. The tests are assuming that the market value for government debt falls to levels similar to those seen in May, but they aren't expected to actually factor in a default by any European government.

John Raymond, a credit analyst at CreditSights, said that's significant because it would only lead to losses on bonds held on a bank's trading book, rather than those bonds that the bank intended to hold to maturity.

In the case of Greek sovereign debt, for example, as much as 90% may be held outside banks' trading books, according to research by Morgan Stanley.

Raymond said he doesn't think the markets will get the level of disclosure they want from the tests and that the only cases where regulators have something negative to say will be where there is already a solution in place.

Spain's unlisted savings banks--known as cajas--are one obvious example. The sector has been hit hard by real-estate related losses, forcing the recent seizure of CajaSur by the Bank of Spain.

Regulators, however, are testing the cajas as though extensive mergers planned for the sector had already taken place, Raymond said.

Overall, concerns