Do Howls From Rome Prove Anything?

Italian Bankers are Not Amused Italy’s banks were among the hardest hit by the ECB’s ‘comprehensive assessment’ and the associated demands to increase their capital. The protests of Italian banks which were even echoed by the Bank of Italy (i.e., Italy’s national central bank) are widely seen as a lending the stress tests legitimacy.
For instance, the FT reports:
‘Analysts and investors have taken the howls of protest from Italian central bank officials on Sunday as evidence that the European Central Bank’s health check on the continent’s banking system is sufficiently tough.
Complaints from Rome about the outcome of the ECB’s comprehensive assessment have demonstrated how Italy has emerged as the biggest loser from the process, which was designed to restore confidence in the EU’s financial system.’
[…] ‘The debate over whether the European banks have lots of holes in their balance sheets is over,’ said Davide Serra, founder of hedge fund Algebris. ‘Banks didn’t know if they had enough capital to lend until now and this will change that.’
‘We now know that we can have a 5 per cent contraction in the eurozone economy and the banks will still have more than 8 per cent capital – that is very positive for the sector,’ he said.
Alas, as this Bloomberg video shows, the debate is far from ‘over’ – not least as numerous banks just sort of scraped by.
In fact, there are other reasons to doubt the toughness of the stress test. We already discussed the large amount of legacy NPLs in the European banking system yesterday, which implies that if a severe downturn were to occur in the near future, this amount would skyrocket to an even more astronomical level.
Moreover, a post stress test aggregate capital shortfall of a mere 24 billion is just not very believable considering all the other data, especially in light of the fact that the great bulk of this shortfall is concentrated in the tiny countries of Cyprus and Greece.
How Adverse is the ‘Adverse Scenario’?

This post was published at Acting-Man on October 28, 2014.