16 November 2014

Notes on ECB’s Comprehensive Bank Assessment (Part 7)

The results of the ECB’s Comprehensive Bank Assessment were published on Sunday, October 26, precisely as “sources” had told to Reuters a while before the date was officially confirmed by the ECB (an intended leak by the ECB’s staff?). As I had expected (recall Part 6 of this series), the final conclusion concerning banks’ capital shortfalls was rather disappointing for those who had hoped to see “blood in the water”: a bare €25 billion which, when taking into account banks’ capital measures after the 31 December 2013 assessment cut-off date, is further reduced to just €9.5 billion.

On the other hand, this ought to be a good news: rigorous review conducted by the ECB and banking supervisors has reportedly confirmed that the European banking system as a whole is almost sufficiently capitalized and after a long period of deleveraging can once again start facilitating more lending in Europe. More lending, in turn, would presumably help economic growth. (Note the words in italic. The font is intentionally different.)

Specifically, that’s what Mr. Vítor Constâncio, Vice-President of the ECB, has reported to have said in the 26 October press release:
“This unprecedented in-depth review of the largest banks’ positions will boost public confidence in the banking sector. By identifying problems and risks, it will help repair balance sheets and make the banks more resilient and robust. This should facilitate more lending in Europe, which will help economic growth.”
This very much sounds like an empty promise (read on for why I think so). Does this guy actually believe what he is talking about?

05 October 2014

Notes on ECB’s Comprehensive Bank Assessment (Part 6)

Everyone interested in the outcomes of the ECB’s Comprehensive Bank Assessment is probably keenly awaiting the results. Sources (whoever they are) have told Reuters that these will be announced on Sunday, Oct. 26. The date is officially not confirmed but anyways, according to the ECB, it will be in the second half of October. Reportedly, banks will be given their results about 48 hours before publication, to enable them to review the figures and prepare any response.

Some are making predictions of how many banks and which ones will fail. “Candidates” include but are not limited to: Germany’s Commerzbank, Austrian cooperative bank Volksbanken, politically-connected banks such as Germany's HSH Nordbank. Some want to see blood:
"Significant capital shortfalls and/or a significant number of banks not passing the test will be the criteria against which the assessment's credibility will be measured," Alain Laurin, associate managing director of Moody's Investors Service has been reported to have said back in July.

ECB’s officials are already pulling down expectations concerning the severity of the conclusions, while arguing that by the time results are published, banks will have done a lot already:

11 September 2014

Notes on ECB’s Comprehensive Bank Assessment (Part 5)

I haven’t been writing a piece for a while as my life has been quite a roller coaster in the meantime. However, a recent call from a reporter for the New York Times reminded me that independent views about the ECB’s Comprehensive Bank Assessment are still sought. So, as promised in the last update on the issue (Part 4 of this series), in this post I’ll elaborate on the baseline and adverse scenarios of the stress test. 

The scenarios were published on the EBA’s website a while ago, on 29 April 2014 to be precise. When compared to the winter 2014 forecast by the European Commission (published on 25 February 2014), which with certain extensions forms the base scenario for the 2014 EU-bank stress test, growth forecasts for the euro area have remained broadly unchanged even if near term projections are gradually edging downwards:

(Click to enlarge)

24 May 2014

Notes on ECB’s Comprehensive Bank Assessment (Part 4)

The second* key pillar in the ECB’s Comprehensive Bank Assessment is a stress test, following the Asset Quality Review (AQR), which is discussed in Part 3 of this series. On 29 April, the European Banking Authority (EBA) released the stress test methodology and scenarios.

EBA faced a difficult choice in calibrating this EU-wide stress test: if they implemented a strict and credible test they risked imposing politically costly capital demands on EU banks; on the other hand, if they implemented too weak a test they would further damage the already blemished reputation of EU banking sector stress tests and (as a commentator has pointedly put it) “look like pointless clowns in the bargain”.

Now the choice has been made and the 2014 stress test scenario is available for commenting. However, as I have pointed out earlier when analyzing the 2011 EU-wide bank stress test results, the scenario may not even be the main issue. How it is being translated into the conclusions at the end, is just as if not more crucial. Therefore – and as other observers mostly focus on the scenario – I’ll explore the Methodological Note first.

11 April 2014

Notes on ECB’s Comprehensive Bank Assessment (Part 3)

The ECB’s Comprehensive Bank Assessment, as I have mentioned earlier, is the main thing to watch in European banking this year. (Recall Part 1 and Part 2 of this series.) A number of months have passed since the kick-start announcement by the ECB on 23 October 2013. Nations’ largest banks must now be busy with extracting the requested data, performing calculations and filling the templates, carefully prepared by the ECB and the National Competent Authorities (NCAs). Let’s take a closer look at what’s going on.

For a quick reminder, the whole assessment exercise consists of the three closely interlinked components:
1.    A supervisory risk assessment
2.    An asset quality review (AQR)
3.    A stress test

20 March 2014

Thoughts on Russia, Ukraine, Money, Politics and Future

I just finished reading Mr. Putin’s 18 March address: http://eng.kremlin.ru/news/6889

His cold-bloodedness is remarkable and he (and his team) appears as pretty skilful in speeches, while: arguing that the referendum in Crimea on March 16 was in full compliance with democratic procedures and international norm (which is hard to believe to say the least – given that Russian troops were there), effectively making use of the historical ties between Russia and Crimea/Ukraine, highlighting the West’s wrongdoings in the past, addressing “external opposition”, thanking everyone who could possibly support Russia’s interests (e.g. Chinese leaders – even though I haven’t noticed anyone of them saying anything definite about the current case of Crimea/Ukraine), and overall, presenting Russia (probably in his person) as a “good dad” who is supporting people’s fundamental interests, democracy, norms of the international law etc.

That sounds great, except for the facts that: antiwar protests are being held in Moscow, pro-reform, pro-democracy opposition Russians are being jailed or put under house arrest, social situation in Russia is worsening rapidly, comment sections of the media outlets are being shut down (Forbes.ru is one example that recently announced hiding and closing all the comments at least for a while), the invasion of Ukraine has polarized members of Russia’s elite etc.

06 January 2014

The 2013 EU-wide Transparency (?!) Exercise

On 16 December 2013, the European Banking Authority (EBA) published the outcome of the 2013 EU-wide transparency exercise. Indeed, there are lots of data about the covered 64 European banks from 21 countries of the European Economic Area (EEA): all together 730,000 data points including capital, Risk Weighted Assets (RWAs) and sovereign exposures. The aggregate total assets of the banks included account for 64% of total assets of the 21 EEA countries. As stated in the press release:
“Through this disclosure exercise, the EBA aims to promote greater understanding of capital positions and exposures of EU banks, thus contributing to market discipline and financial stability in the EU.”

It may sound great, but… what the heck transparency? Even if I looked into the data closely enough I did not become much smarter about the banks’ true capital positions than I was before. Drawing any definite conclusions at all apart from the fact that it’s a total mess with the reported numbers of the European banks seems mission impossible. I’m not jealous of anyone who is tasked with sorting it all out; the technical staff of the EBA and the ECB has a Gordian knot to solve.

As follows, I’d like to highlight quite a few issues with the disclosed data – for those who want or need to actually use them.

27 November 2013

Notes on ECB’s Comprehensive Bank Assessment (Part 2)

In his opening speech at the European Banking Congress “The future of Europe” (22 November 2013), Mr. Mario Draghi, the President of the ECB, said about the ongoing ECB’s comprehensive bank assessment:
“It is clear that there needs to be much more confidence in banks within and across countries that are joining the SSM. This is the objective of the ECB’s comprehensive assessment.”
Then he briefly explained how the assessment is ought to boost confidence. The keyword was/is “transparency”: giving all parties more transparency.

As was discussed in Part 1 of this series, more transparency about the banks’ balance sheets is badly needed indeed. So this sounds good as far as it goes. But… wait a minute: is it going to be real transparency for the investors and public in general, or is it rather that the outcome of the exercise is decided already and the key issue for the ECB is to build a credible process around it? (The pre-decided outcome would be something in style: all systemically important banks are fundamentally sound; the banking system as a whole just needs x billion euros of additional capital where “x” is a number that sounds big enough but is still manageable with limited private sector involvement and not too much public money.)

As also implied in Part 1, the amount of fresh capital that is actually needed for plugging the holes in the banks’ balance sheets is fairly big, measured in trillions rather than in billions of euros. I’d even say: none of the systemically important European banks would survive a fair stress test without external support. So in my notes, I’m first of all trying to follow how the credible process is being built – or the illusion of it. I also highlight open issues and “devils in details” should I observe them.

12 November 2013

Notes on ECB’s Comprehensive Bank Assessment (Part 1)

Next year in the same time we are supposed to know the truth about the balance sheets of large European banks. Namely, the ECB is planning to conclude the comprehensive assessment of the euro area’s banking system in October 2014, prior to assuming its new supervisory tasks in November 2014. Will it be an honest estimate or yet another failed attempt to convince someone (stakeholders) in the soundness of banks – failed like the previous stress tests failed?

Whatever the exact outcome, the ECB’s comprehensive bank assessment is going to be the main thing to watch over the next 12 months in European banking. In the series of articles “Notes on ECB’s Comprehensive Bank Assessment”, I intend to summarize my observations, notes and opinions on the topic. The first piece will be about the details announced on 23 October 2013. I shall begin with an overview of the current state of affairs, though; context is important. The topic itself will be more thoroughly discussed starting from Part 2.

27 October 2013

Should We End Credit Creation Rather Than Do Tapering?

According to this report the Fed may be wary of tapering:

According to reports that I have seen more than 90%of money supply is credit as opposed to base money.

And the Fed is now nervous about ending tapering, yet what it is doing is printing base money.

This problem of causing interest rates to rise once they have fallen too far is the problem that I forecast years ago when I wrote about the Low Inflation Trap and its causes. Asset values are far too sensitive to interest rate increases, yet to get back to normal those increases are necessary.