Risk diversification and stock investment: why, the general public does not know what happened

Juergen Stark, former chief economist and executive board member at the European Central Bank, said the ECB is putting “incalculable” risks on its balance sheet through the asset-backed securities purchase programme.

Seniority complex

ECB may find that senior risk can be dangerous

07 October 2014 Neil Unmack

The European Central Bank’s asset-backed debt scheme echoes the 2008 crisis. It hopes to avoid losses by buying bonds least exposed to defaults. That didn’t save U.S. insurer AIG. The ECB needs to manage the tension between two goals: revive securitisation or increase its balance sheet.

The asset-backed securities (ABS) programme is generating protests in Germany. Juergen Stark, a former ECB executive board member, argues the programme will leave “incalculable” risks on the central bank’s balance sheet. Those risks are academic and reputational: the ECB can’t be declared insolvent like an ordinary entity.

Even then, the fears look excessive at first glance. The plan is to buy senior-ranking tranches of bonds backed by corporate loans or mortgages, thus making it easier for banks to sell the lower-ranking layers, and release capital. Buying just the senior bonds should insulate the ECB from all but extreme losses: even Greece’s crisis didn’t push senior Greek ABS into default.

But the ECB faces other risks. One is adverse selection: banks may repackage their worst credits into new deals, causing higher-than-normal levels of losses. And, if they know they can transfer risks through securitisation, banks may make bad loans. The sub-prime mortgages that sank AIG are an example, but moral hazard is not the preserve of U.S. institutions: examples in Europe came from bonds backed by German corporate debt.

History needn’t repeat itself. European regulations impose tougher rules on securitisation: banks have to retain some of the loans they securitise. Deals that meet the ECB purchase programme will need to have data available on each loan, and abide by its collateral framework. Yet these defences aren’t perfect. The “skin in the game” rules aren’t very tough; the ECB’s collateral rules aren’t overly rigorous.

The ECB has its own tensions. It wants to revive securitisation to create new sources of funding. It also wants to grow its balance sheet to keep monetary policy loose. Yet buying a lot of assets could cause risk to be mispriced. The ECB has signalled it could be comfortable buying up to 70 percent of each deal – making it potentially the dominant investor. If private purchases don’t work, pressure will grow for the ECB to buy the more controversial sovereign bonds. Even central bankers aren’t immune to moral hazard.

However, the loss of 240 billion yen of Sumitomo Corporation, why, the general public does not know what happened. High-risk, high return, the probability of a large oil field discovery is 5% or less petroleum exploration and development. Therefore, the major Western is managed by the same portfolio risk diversification and stock investment. Japanese companies in the lack of information, to participate in the project of one or two, at the left the other company, to succeed it is rare. Therefore, there is a joke that oil is cheaper in NY, can be found in low-risk. In other words, is the acquisition of the oil company in the NY stock market. Of one third of the crude oil price of $ 92 for $ 30 before and after the acquisition of the company to obtain the oil reserves of the other company, people in the dismissal restructuring is unnecessary, my Exxon Mobil, Chevron Twice experienced in U, Inc. Thank you. Is that it is a high risk, you could well understood. Also loss of Sumitomo Corporation, wonder that also seems to events without the oil and gas industry severe. I was looking forward greatly to the shale gas at that time, and the Japanese government, had been showing cooperation attitude to exports the United States. In the neighborhood? Something . Exports reverse three-month slide Tankers loading on Iraq's southern export terminals in the Basra Gulf, the country's only export route. (ALI ABU IRAQ/Iraq Oil Report) By Ali Abu Iraq and Staff of Iraq Oil Report Published Friday, October 3rd, 2014 Iraq's oil exports edged upward in September, to 2.542 million barrels per day (bpd), as infrastructure bottlenecks eased slightly and production in Iraq's southern fields continued to increase.Rising production and exports in Basra have partially compensated for major losses in the north. Since March, Iraq's export pipeline to Turkey has been offline due to constant sabotage and violence; and since June, militants led by the so-called Islamic State (IS) group have conquered territory throug... Sunni tribes turning on ISIS and Peshmerga A Peshmerga fighter holds a rocket propelled-grenade (RPG) near an ISIS flag hoisted on the other side of a bridge in Rashad, on the road between Kirkuk and Tikrit, on Sept. 11, 2014. [JM LOPEZ/AFP/Getty Images] By Mohammed Hussein, Patrick Osgood, Rawaz Tahir, CHRISTINE VAN DEN TOORN and Staff of Iraq Oil Report Published Tuesday, September 16th, 2014 Iraq's newest initiative to convince Sunnis to fight alongside the government has combusted into a volatile, multi-sided conflict in northern Diyala province – a strong indication of how difficult it will be to build and maintain a national coalition against extremist militants.The biggest flashpoint has been around Jalula, a town in Diyala along the disputed border between the autonomous Kurdistan region and Arab-dominated southern Iraq.Since Saturday, Sunni Arab tribesmen aligned wi... ============ As oil dips below $90, a reminder of Gulf 2014 budget breakeven prices: Bahrain $135, Saudi $93, rest < $80 Budget breakeven oil prices in most Gulf Arab producers are creeping upwards, as governments continue to push through investment stimulus programs despite flatter production. The budget breakeven price is a useful tool to understand what price of oil is needed to ensure that a budget is in balance for a given level of government spending. Breakeven prices for Gulf states shot up from an average of USD 43.2 per barrel in 2007 to USD 78.8 by 2011 in the wake of the Arab Spring, as governments unleashed billions of dollars of investment to appease their populations. Breakeven oil prices fell in 2012 but the dip proved to be temporary and breakeven prices have again begun to edge up, notes Deutsch Bank. "For the region as a whole, we estimate that the breakeven price increased by about USD 6 per barrel to USD 79 per barrel in 2013 as oil production stabilized but public spending continued to grow. "We think that the breakeven price for the region will increase a little further this year to USD 81 barrel with a moderate increase in oil production helping to offset the impact of further growth in government spending," wrote Richard Burgess, analyst at Deutsche Bank in a note to clients. PRODUCTION PRESSURES OPEC crude oil supplies dropped by 890,000 barrels per day in March, as Iraqi, Saudi and Libyan exports fell, according to the International Energy Agency. OPEC heavyweight Saudi Arabia's output fell to the lowest level in almost a year in March, down by 285,000 bpd to 9.57 million bpd from February levels. "Saudi supplies to the market, which include sales from storage, were reported at 9.53 million bpd in March, around 370,000 bpd below the previous month," the IEA said in its April report. Deutsche Bank expects Saudi output to average around 9.8 million bpd this year, similar to its production level of 2012 -- but breakeven prices are expected to much higher than the USD 81 in that year. "The increase stems from: the small drop in oil production last year; moderate growth in real public spending of about 2%; and a drop in non-oil revenues. Even if oil average for last year, we think the budget breakeven price (for Saudi Arabia) will edge up a little further to USD 93 per barrel this year. "This would allow for further positive real growth in public spending of about 1%. The breakeven price could be lower than this, however, if nonoil revenues rebound more strongly than we have assumed." BIG SPENDERS Oil production from the UAE, Kuwait, Oman and Qatar has been steady over the past few years and is likely to remain at similar levels. But what's changed is public spending patterns, which are moving the needle on breakeven prices. In Qatar, gas production has reached a near-term plateau while oil production from mature fields has fallen (Deutsche Bank includes gas prices in its breakeven oil price figure). "The government is proceeding with efforts to diversify the economy, with a number of large capital projects, and this will push the breakeven price up to USD 68 barrel this year," Deutsche noted. Fiscal expansion is also continuing in Kuwait, which will see breakeven prices increase. "Having been the lowest in the region for many years, the breakeven price in Kuwait will probably exceed USD 70 per barrel this year." But that's not the case in other Gulf states. In the UAE, budget breakeven oil price has eased back from USD 95 per barrel in 2011 -- at the height of the government's fiscal stimulus -- to around USD 72.2 per barrel last year. The breakeven price is expected to slide back to USD 71 per barrel in 2014 - the lowest in six years. Fiscal consolidation is also bringing down the breakeven price in Oman following a spike in government spending in 2012. Compared to other countries that rely heavily on hydrocarbon exports, Gulf states seem to be in a much better fiscal position to sustain themselves in the event of a decline in oil prices. Gulf states generated a little over USD 500 billion in oil revenues in each of the past few years, and they remain well cushioned from a sudden crude price crash. BAHRAIN NEEDS MORE Within the region, of course, there are huge discrepancies. Bahrain, a small oil producer, has the highest breakeven oil price of USD 134 per barrel for 2014, given its weak fiscal position. Indeed, Bahrain's breakeven is higher than all the other oil-producing countries surveyed by the German bank, including Venezuela (USD 121 per barrel), Nigeria (USD 118.8) and Russia (USD 101.7). "The political unrest of the past three years has already been a drag on economic growth and has raised fiscal vulnerabilities as the government has responded with additional expenditure," said Citibank in a report. The Wall Street bank expects non-oil growth to slow down, but oil production to stabilize, resulting in medium-term growth in the 3.5% to 4.5% range. "Upside risks to this outlook include a resolution of the country's ongoing political turmoil (still unlikely in the near term, in our view, despite latest initiative) and greater-than-expected assistance from Gulf neighbors, including Saudi Arabia. This may include, for example, an increase in the allocated share of output from the shared Abu Safa oil field, which would dramatically boost Bahrain's domestic Published on Oct 13, 2014 Russian ruble's down, but is it because of sanctions? "Not really" says financial consultant Patrick Young. The reasons: US stops flooding the world with green-bucks and Saudi oil manipulations. ============================== There is nothing more valuable than water, but the depletion of the water is concerned. A large amount of water is required industry, even in energy development, along with the production of oil and gas of fossil fuel, a large amount of "fossil water" is produced. With water that has accumulated in the hundreds of millions of years ago the ancient salt is small, can be treated, "fossil water" is used as industrial water. =============== BreakingNews: #IS advancing inside #Kobane #AynalArab city. Tell Sh'eer and the Hospital are both under #IS control now. ======== World economies warn of global risks, call for bold action Sat, Oct 11 19:49 PM EDT By Krista Hughes and Leika Kihara WASHINGTON (Reuters) - The International Monetary Fund's member countries on Saturday said bold action was needed to bolster the global economic recovery and they urged governments not to squelch growth by tightening budgets too drastically, although Germany poured cold water on the idea of a new global "crisis." With Japan's economy floundering, the euro zone at risk of recession and even China's expansion slowing, the IMF's steering committee said focusing on growth was the priority. "A number of countries face the prospect of low or slowing growth, with unemployment remaining unacceptably high," the International Monetary and Financial Committee said on behalf of the Fund's 188 member countries. The Fund this week cut its 2014 global growth forecast to 3.3 percent from 3.4 percent, the third reduction this year as the prospects for a sustainable recovery from the 2007-2009 global financial crisis have ebbed, despite hefty injections of cash by the world's central banks. The IMF has flagged Europe as the top concern, a sentiment echoed by many policymakers, economists and investors gathered in Washington for the Fund's fall meetings. European officials sought to dispel the gloom. European Central Bank President Mario Draghi said the drag from fiscal tightening in the euro zone was set to fade, while German Finance Minister Wolfgang Schaeuble downplayed the idea that the region's largest economy was at risk of recession. "There is no reason to talk about a crisis in the global economy," Schaeuble said. The IMF committee called for fiscal policy flexibility, but efforts to provide more room for France to meet its European Union deficit target looked set to founder on Germany's insistence that the agreement on fiscal rectitude was set in stone and that the bloc would not be writing any new checks. STORM CLOUDS GATHER The United States has been a relative bright spot in the otherwise darkening global economic picture, and investors have rushed into dollars as a result. Still, while U.S. growth has picked up, soft inflation and wage growth suggest the slowest-ever postwar recovery is not delivering a sustained boost to demand, and concerns are growing that the global slowdown will undercut the U.S. economy as well. Top officials from the U.S. Federal Reserve highlighted growing risks, with the central bank's No. 2 saying the global slowdown could delay plans for a U.S. interest rate hike. "In determining the pace at which our monetary accommodation is removed, we will, as always, be paying close attention to the path of the rest of the global economy and its significant consequences for U.S. economic prospects," he said at a conference of the Institute for International Finance. The IMF panel urged nations to carry out politically tough reforms to labor markets and social security to free up money to invest in infrastructure to create jobs and lift growth. "Our key concern is to look ahead so that we avert .... the very real risk of a prolonged period of subpar growth," said Singaporean Finance Minister Tharman Shanmugaratnam, the panel's chairman. The committee also called on central banks to be careful when communicating changes in policy in order to avoid financial market shocks. While not naming any central banks, the warning appeared aimed at the Fed, which is set to end its current bond-buying program this month. Its next step, expected in mid-2015, would be to raise rates. The Fed has debated a change to its commitment to holding rates near zero for a "considerable time" at its recent policy meetings, but is stepping gingerly to avoid roiling financial markets. It does not want a repeat of the "taper tantrum" it touched off last year when it signaled its easing of monetary policy was drawing to a close. (Reporting by Krista Hughes and Leika Kihara; Additional reporting by Howard Schneider, Jason Lange, Randall Palmer, Anna Yukhananov and Jan Strupczewski; Writing by David Chance; Editing by Tim Ahmann) ========== Six years after Lehman’s crash, US and UK play out next financial crisis War game designed to test readiness of central banks as exercise will stress-test new global regulations Larry Elliott in Washington The Guardian, Saturday 11 October 2014 The top financial brass from the Treasuries and central banks of Britain and the US are to take part in a war game, behind closed doors in Washington on Monday, to test how they would handle another Lehman Brothers-style banking crisis . Six years after the financial earthquake that led to the multibillion-pound taxpayer bailouts of Royal Bank of Scotland and Lloyds Banking Group, the most senior policymakers from both sides of the Atlantic will try to find out whether they are now any better prepared for the collapse of a bank deemed too big to fail. The chancellor, George Osborne, and Mark Carney, the governor of the Bank of England, will stay on at the end of the annual meetings of the International Monetary Fund and World Bank to head the UK team in the exercise, which is to be held at the offices of the Federal Deposit Insurance Commission – the organisation that guarantees US bank deposits. They will be joined by 11 others, including the chairman of the Federal Reserve, Janet Yellen, the US treasury secretary, Jack Lew, and regulators from Britain and America, for a test of how the authorities would respond to two possible scenarios – the collapse of an American bank with UK operations and the failure of a British bank with operations in the US. Although the war game will not be based on any specific institution, UK banks with operations in the US include Barclays and HSBC, while US investment banks such as Goldman Sachs and Bank of America have a big presence in the City. Osborne said it was the first time a war game had been conducted at such a senior level. “We will work through how we would respond to the failure of a cross-border firm. We are going to make sure we could handle an institution previously regarded as too big to fail,” he said. The decision by the US authorities to let Lehman collapse in September 2008 set off a chain reaction in financial markets that was only halted when governments around the world stepped in with taxpayers’ cash to recapitalise banks seen as at risk. Monday’s game will involve the collapse of a single bank rather than the sort of systemic failure threatened in 2008. But Osborne said lessons had been learned from 2008, with policymakers now having options they lacked then. The chancellor said he needed to be sure the government was better prepared for “what’s thrown at us and better prepared to protect taxpayers than the previous administration in the UK was”. The last Labour government pumped more than £65bn into RBS and Lloyds in October 2008 but Osborne said “enormous progress” had been making on tackling the too-big-to-fail problem since then. The war game is designed to stress-test the new domestic and global rules for regulating and supervising banks devised since 2008. In the UK, the government has handed new watchdog powers to the City, ring-fenced the retail operations of banks from their investment arms and forced banks to hold more capital. At the global level, the Financial Stability Board, chaired by Carney, has been seeking to ensure financial regulation is consistent across borders. Osborne said: “In 2008, the judgment of my predecessor and others was that banks like RBS were too big to fail. I want to make sure that either myself or my successors in this job would have real options and would avoid bailing in the taxpayer. I’m pretty confident that is the case.” The chancellor said Monday’s event would try to pack into a morning a crisis that would unfold over several days. “No war game is like war itself,” Osborne said. “But it means we will be far better prepared. I’m sure this is not the last time this will happen.”Monday’s war game will take place after the annual meeting of the International Monetary Fund in Washington in which the risk of a fresh recession in the euro zone has been a dominant theme. Osborne said the problems of the euro zone posed “the biggest threat to the world and UK economies” and admitted that Britain was “not immune” to the deteriorating outlook for its biggest trading partner. “This is a critical moment for the British economy and the world economy”, the chancellor said. “Serious clouds are gathering on the horizon”. Osborne made it clear that he expected UK growth to slow as a result of its exposure to the euro zone. “There are risks to Britain’s growth from the euro zone and we are seeing some of them materialise”, he said. The chancellor said that the euro zone finance ministers and central bank governors knew they were “under the microscope” in Washington. “They know they have some questions to answer.” http://www.theguardian.com/business/2014/oct/11/lehman-crash-play-financial-crisi-war-game ============ The Asian markets ended lower amid heightened risk aversion due to continuing uncertainty about the trajectory of global growth. The Australian market was the worst performer in the region, with the nation's key average plunging over 2 percent. The sharp retreat in commodity prices also worked against the markets. Australia's All Ordinaries languished below the unchanged line throughout the session before closing down 107.60 points or 2.03 percent at 5,186, its lowest closing level since February 7th, 2014. The markets witnessed a broad based sell-off, with energy stocks among the worst hit. The major U.S. index futures are pointing to a lower opening on Friday, with sentiment reflecting an extension of the negative mood that was evident intermittently in recent sessions. With global growth concerns engulfing the markets, money is being moved out of risky bets and into safe havens. Accordingly, commodities, equities and risk currencies are seeing weakness. With no meaningful catalysts to influence trading in the session, a reversal in sentiment is unlikely, although Fed speeches scheduled for the day could create ripples in the markets. U.S. stocks succumbed to a wave of selling on Thursday, as global growth worries were accentuated by weak German exports data. The major averages opened lower and declined steadily throughout the session before closing at their lowest levels in about 2 months. ==================

Insight: Sewage, "sloppy fits" and a tomb - Goldman's India build

Tue, Oct 23 06:39 AM EDT 1 of 3 By Tom Bill and Aditi Shah LONDON/MUMBAI (Reuters) - Goldman Sachs' reputation for hard-nosed efficiency faces a test in the chaos of Indian building standards, according to architects hired by the Wall Street bank. Construction is due to start soon on a Bangalore campus for some 4,000 back-office Goldman Sachs staff, but a report by Toronto-based architect Adamson Associates seen by Reuters said the project faces a string of obstacles including shoddy construction, corruption, poor sanitation and an on-site tomb. "India's industry standards of construction quality for commercial office space have not yet reached international standards, much less GS standards," the report said. It recommended developers "provide extra margins of tolerance (ie a 'sloppy fit')" and "not design anything that requires total precision" for the 22-acre site, which is close to a busy stretch of Bangalore's six-lane outer ring road. Goldman Sachs and Adamson Associates declined to comment. The bank's reaction to Adamson's recommendations is not clear. The report gives a rare behind-the-scenes insight into the way multinational companies in India view local standards and some locals have reacted angrily to the suggestion Goldman will have to lower its expectations so far. "This is a wrong notion. A wrong perception is being created. I would like to really confront a person who thinks like this," said Lalit Kumar Jain, national president of the Confederation of Real Estate Developers' Association of India. "This is a prejudiced mind without really understanding the reality on the ground of this country." The reaction to the architect's report will generate further publicity for the intensely scrutinised bank.

"It's a bit of a cheap shot for a foreign architect to throw stones at Indian construction standards," said one international developer operating in India who did not want to be named for fear of drawing criticism. "The standards are not the same but then neither is the cost. And that is why Goldman Sachs is putting a million square feet in India."

Construction costs in India are about 75 to 80 percent lower than in London, he said. But Ramesh Mysore, a Bangalore-based director of corporate real estate at outsourcing company Convergys, which entered India more than a decade ago and has more than 10,000 staff in the country, said the report only stated the obvious. Red tape and inexperienced developers are a big hurdle. "The challenge in India is there is still ambiguity in people giving a commitment and achieving it. In other countries, there is more promptness and respect," he said. "BIG BANG" As the financial crisis forces Western banks to rein in costs, they have increasingly turned to emerging economies to set up operations with lower wages and rents. Companies can save between 40 and 70 percent in places such as India, Asia's third-largest economy, according to a report this year by U.S. business consultant Everest Group and NASSCOM, an Indian industry body for technology companies. Earlier this month Goldman Sachs announced a third-quarter profit of $1.5 billion versus a $428 million loss in 2011 against the backdrop of a $1.9 billion cost cutting programme. Its Bangalore project - codenamed "Big Bang" inside the bank - will move workers from four offices elsewhere in Bangalore into a single campus about 15 km (9 miles) south-east of the city centre by 2017. The documents, more than 2,000 pages in all, underline the huge scale of Goldman's plans in the country. The Bangalore operation accounts for about 12 percent of the bank's global staff but that could more than quadruple to 18,000, the report said. The campus, which measures 900,000 square feet, comprises two buildings. Floor space will double if Goldman exercises development options. That would give it a site not much smaller than its 2.2 million-square-foot HQ in New York, a skyscraper on which Adamson was the executive architect. Goldman will pay an annual rent of about 565 rupees ($11) per square foot, local real estate agents said. That compares to a typical figure of 55 pounds ($89) in London's financial district or about $90 in the midtown Manhattan area of New York. Banks such as Bank of America Merrill Lynch, Barclays, HSBC, JPMorgan and RBS also have functions like risk and fraud management, finance and accounting in self-contained Bangalore sites known in India as "captive centres". SEWAGE AND STRAY DOGS However, building in India is not always straightforward. When a Reuters reporter visited the area where the Goldman Sachs campus will be located earlier this month, he saw a site fenced off with corrugated metal sheets. The presence of steel reinforcement rods was the only evidence of planned construction work at the site, which, based on maps contained in the Adamson report, appeared to be the future home of the Wall Street bank. Stray dogs wandered through pot-holed streets and dirt and rubbish were piled up in the surrounding areas, at odds with the glass-fronted modern office blocks which house firms including JP Morgan, Nokia and Cisco. A large sewage canal ran nearby, where a breeze blew foam into the air. The architect report notes the canal and warns of the possibility of foul odours, depending on "time of year (and) wind direction." Adamson underlined how closely Goldman Sachs should monitor the build, recommending "extensive use of mock-ups" that require approval before the final phases of building work proceed. "Keep the design simple, straightforward and easily understandable. Complex shapes will not likely be well-constructed," it said, while emphasizing the building had to be the best quality office block in Bangalore. Delays and shoddy construction at the 2010 Commonwealth Games in New Delhi, India's capital, exposed the dearth of skilled labor, building technology and expertise in the country. But things have improved since then, say people in the industry. "What happened at the Commonwealth Games was not good but the important thing to note is not everything happens like that," said Convergys Corporation's Mysore. "If you get attracted to a developer because the building looks great, is cheap and comes with some goodies, you are being misguided. You need to exercise caution," he said. The economic boom of recent years has helped to improve construction standards, local developers said. "Some of our buildings are better than some American ones," said J. C. Sharma, chairman of Bangalore-based Sobha Developers, which has built more than 24 million square feet of space for technology company Infosys. "Foreign architects should come and see the buildings here to realise India is also improving, although more slowly than China." RISKS That said, Goldman will still have to overcome the lack of a municipal sewer system and an unreliable water supply network. The report recommends the Bangalore campus treat waste on-site and install waterless urinals, even though it acknowledges associated "odours and cleanliness issues". Further hurdles include what the architect refers to as a tomb on the site that Goldman will have to take into account when positioning the perimeter wall. The Reuters reporter saw a gravestone marked with the dates '1913-1981' near the perimeter fence of the site presumed to be the future Goldman campus. The bank will also struggle to fit lifts in its building that are up to its usual standards, Adamson said. "The Indian market does not seem to value elevators as an aesthetic element," it said. "An aggressive full coverage preventative maintenance programme" was the only way to ensure they didn't break down. Goldman faces considerable "reputational risks" associated with the project, given India's reputation for corruption, use of child labor and the often basic conditions in construction worker camps, the report warned. The international developer working in India said the bank would have to minimize risks and increase security. "There are so many people waiting for Goldman to make a mistake." (Reporting by Tom Bill; Additional reporting by Harichandan Arakali in Bangalore; Editing by Sophie Walker and Simon Robinson)

Eight European Banks Fail EU Stress Test

9:47pm UK, Friday July 15, 2011

Tadhg Enright, business reporter
Eight European banks have failed a so-called stress test designed to show their ability to cope with economic shocks such as a sharp drop in economic growth or a decline on the stock markets.

The tests, which have been applied to Europe's 91 biggest banks, are designed to win back the confidence of investors and markets from which they borrow.

The four UK banks subjected to the tests - Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland - were shown to have passed the threshold of having reserves worth more than 5% of the value of their liabilities.
A further 16 banks were shown to have barely passed - having reserves worth between 5% and 6% of their liabilities - and have been encouraged to raise their capital ratios to more healthy levels.


Five of the failing banks are in Spain where the solvency of local savings banks, known as Cajas, have been in doubt throughout the financial crisis.

Two banks failed in Greece, where the bailed-out economy remains in recession as it struggles to escape from a mountain of debt.

One Austrian bank failed the test while a German bank withdrew from the process when it learned that it would also fail.

Like all testing processes, there need to be enough failures to make the success of others appear suitably difficult to achieve.

Tadhg Enright

The London based European Banking Authority (EBA) estimates that the failing banks need to raise a total of 2.5bn euros to meet capital requirements.

Bank officials will spend the weekend devising fundraising plans to win back the confidence of the markets before trading resumes on Monday.

Among their options are sell-offs of non-core assets, issuing new shares to raise money from private investors or negotiating government bailouts.

Banks that cannot raise new funds could lose the confidence of their customers, have their shares dumped by investors and be refused credit from debt markets, leading to their eventual collapse.



It is the second time that European banks have been subjected to the stress test and the EBA has applied tougher criteria after last year's test was seen by many as having been too lenient.

This year, banks were asked to demonstrate their ability to cope with a 0.5% drop in economic growth in the Eurozone and a 15% drop in stockmarkets.

They have also been asked to reveal how much debt they hold in troubled eurozone countries, such as Greece and Ireland.

Critics have argued that the criteria should have included a bank's ability to withstand a default by Greece on its debts, which many believe is an inevitable outcome to its financial crisis.


There are currently no comments for this story. Be the first to comment below, and let us know what you are thinking.

===
Reuters
Europe's banks could cope with a Greek haircut

(Refiles to replace repeated "Italian" with "Irish" in third paragraph)




(The authors are Reuters Breakingviews columnists. The opinions expressed are their own)
Banks could cope with a Greek haircut
By George Hay and Peter Thal Larsen
LONDON, July 18 (Reuters Breakingviews) - Europe's banks can mostly deal with a fat haircut on their holdings of Greek sovereign debt. That's the conclusion of a Breakingviews analysis of data disclosed by lenders under the European Union's latest stress tests.
Officially, just eight banks failed this year's stress tests, with a capital shortfall of 2.5 billion euros. But the exam had a major flaw: it did not require banks to apply a haircut to the majority of their holdings of euro zone peripheral debt. That's at odds with reality: any revised bailout package for Greece is likely to force banks to recognise at least some losses on their debt.
The Breakingviews test shows what would happen under such a scenario. It takes the banks' holdings of sovereign debt in their banking books and applies a haircut to Greek, Portuguese, Italian, Spanish and Irish bonds based on where the countries' 5-year bonds were trading last Friday. The value of Greek bonds, for example, is slashed in half.
As a result, the Breakingviews test shows 27 banks failing the test, with an overall capital hole of around 25 billion euros -- 10 times the official number.
That sounds scary. But the biggest problem is in Greece itself, where the resulting capital hole is 13.6 billion euros. This is not much more than the 10 billion euros that Greece has already set aside to recapitalise failing banks.
There's also a knotty problem for Cyprus. The two Cypriot banks covered by the test would face a capital hole of 2 billion euros. Although that's 11 percent of GDP, the government's own debt is 61 percent of GDP so it could stump up the cash if it had to.
Portugal and Spain also take a hit under the Breakingviews test, with capital shortfalls of 3.3 billion euros and 6 billion euros respectively. But in the context of those countries' economies, that is not a huge amount.
Investors may quibble with some of Breakingviews' assumptions. In particular, some may feel the pass mark core Tier 1 ratio of 5 percent is too low. Raise it to 6 percent, and the number of failing banks jumps to 38, and the capital hole goes up to 45 billion euros.
The tests do not mean that euro zone leaders can just merrily let Greece default. They need to recapitalise their banks sufficiently to deal with such an event -- not merely to deal with the stresses envisaged in the official tests. And they need to put in other firewalls to deal with the second-order impact of a default.
But if they do that, a Greek default need not be a disaster.

CONTEXT NEWS
-- Twenty-seven European banks would have to raise 25.7 billion euros of fresh capital according to a Breakingviews stress test of the sector's sovereign debt exposures.
-- Results of the official stress tests revealed by the European Banking Authority on July 15 found that eight lenders had failed to maintain a core Tier 1 capital ratio of 5 percent under a stressed scenario. The capital shortfall was 2.5 billion euros. An additional bank from Germany, Helaba, pulled out of the tests last week and is thought to have also failed.
-- The EBA test subjected banks' exposures of sovereign debt held in their trading books to a haircut based on a market shock. However, most banks hold government bonds in their banking books, which are not marked to market. Instead, the EBA required banks to set aside some provisions for lowly-rated sovereign debt in their banking books.
-- The Breakingviews test applied a haircut to banking book exposures for banks' holdings of Greek, Portuguese, Irish, Italian and Spanish sovereign debt. The haircut is based on the market price of 5-year bonds on July 15.
-- Greek debt is therefore haircut by 52.8 percent, Portuguese debt by 33.3 percent and Irish debt by 38.5 percent. Italian and Spanish bonds are haircut by 5.7 percent and 8.6 percent, respectively.
-- The aggregate haircut was then deducted from the banks' stressed Core Tier 1 capital ratio, after adding back provisions banks had set aside to cover potential sovereign losses. The calculation does not factor in any tax benefits from greater losses.
-- Under the Breakingviews scenario, all six Greek banks fall short of a 5 percent core Tier 1 capital ratio, with a capital requirement of 13.6 billion euros. Marfin and Bank of Cyprus would also fail and need 2 billion euros of extra capital.
-- Thirteen Spanish lenders fail the Breakingviews tests, up from 5 in the official exam, with a combined capital shortfall of almost 6 billion euros. Portugal's four lenders would require a total capital injection of3.3 billion euros.
-- EBA results: http://stress-test.eba.europa.eu/

((george.hay@thomsonreuters.com; peter.thal.larsen@thomsonreuters.com))
(Editing by Hugo Dixon and David Evans)


===

Reuters
EU banks' stress test hangovers aren't equally bad

(The author is a Reuters Breakingviews columnist. The opinions expressed are his own)

By George Hay
LONDON, July 20 (Reuters Breakingviews) - Europe's banks have had their exam results, and they were hardly prize winning. Although only eight of the 90 banks that sat the European bank stress tests failed even to muster 5 percent core Tier 1 ratios, a further 16 did not get above 6 percent. The good news is that over half of the candidates tested can point to actions they are taking to recapitalise. The bad news is that some of these plans are more credible than others.
The teacher's pets are, for the most part, the Spanish banks. Although 5 of the country's 25 lenders participating in the test failed, they have an excuse. The European Banking Authority, which set the test rules, did not allow them to include generic provisions -- cash they have set aside to cover non-specific future losses -- towards capital. That looks harsh.
Adding back these provisions does wonders for Spanish banks' capital strength. Banca Civica came close to failing the test with a core Tier 1 capital ratio of 5.6 percent under stress. Include generic provisions and the ratio leaps to 9.4 percent. Mandatory contingent convertible notes issued by the Cypriot lenders, Bank of Cyprus and Marfin, are in a similar category. Though they did not meet the EBA's strict criteria, they boost each bank's capital ratio by over 3 percentage points.
HSH Nordbank's plans don't look nearly as robust. The German landesbank's 5.5 percent capital ratio under the test is improved by a 3.6 percent uplift from mitigating factors. But this comes from so-called "disinvestments and restructuring measures". Achieving these depends on HSH selling assets at the right price. National Bank of Greece's planned 2 percent uplift similarly hinges on disposals.
Shaky mitigation schemes are bad enough. But if euro zone peripheral government bonds had been marked to market prices, 27 of the 90 banks tested would fall below 5 percent, according to Reuters Breakingviews' own stress test. The problem may then be then not just be that banks' contingency plans aren't very robust, but that some of the lenders in trouble do not have any such plans at all.
-- Graphic: Effect of mitigating measures: http://r.reuters.com/tad72s
-- Breakingviews euro zone bank stress tests calculator: http://r.reuters.com/jyw62s

CONTEXT NEWS
-- Just over half the banks stress-tested by the European Banking Authority on July 15 announced measures to increase their capital strength by the end of 2012.
-- The EBA's disclosure for each of the 90 banks tested shows that 47 assume that their capital position after a macro and sovereign shock would be augmented by various measures. These include generic provisions already booked, convertible bonds, and disposal programmes that have not yet been completed.
-- ATE Bank of Greece assumes the highest uplift from these mitigating factors, with a 6.8 percent benefit from provisions and equity-raisings. Oesterreichische Volksbank assumes a 5.3 percent increase, while Spain's Banca March envisages a 4.3 percent uplift.

((george.hay@thomsonreuters.com))
(Editing by Peter Thal Larsen and David Evans)


===

No bank tax in Franco-German deal on Greece



Options on the table to address euro zone crisis
3:45am EDT

Related News

Banks ready multi-strand Greek rescue plan: sources
Wed, Jul 20 2011
Scenarios: Possible impact of a Greek ratings default
Wed, Jul 20 2011
France says seeks lasting Greek solution at summit
2:54am EDT
Banking tax plan dropped from Greek package: sources
4:09am EDT
EU leaders must "get a grip" on debt crisis: Osborne
3:45am EDT
What to look for today in the euro zone crisis
3:48am EDT
Debt buyback idea gains ground in Greek bailout: source
4:44am EDT



By Gernot Heller and Luke Baker

BERLIN/BRUSSELS | Thu Jul 21, 2011 4:44am EDT

(Reuters) - Germany and France have ruled out a bank tax after reaching a common position on a second bailout of Greece to prevent the country's debt crisis spreading through Europe, EU sources said on Thursday.

The accord came after seven hours of talks late into Wednesday night between German Chancellor Angela Merkel and French President Nicolas Sarkozy in Berlin, sources in both governments said.

European Central Bank President Jean-Claude Trichet joined Merkel and Sarkozy for part of their talks and one source said their agreement, kept secret to avoid offending other euro group leaders at a summit on Thursday, had his blessing.

"You should assume that there will not be a banking tax," the source told Reuters.

Another source involved in preparatory talks for the emergency summit of the 17-nation currency area confirmed that the banking tax proposal, raised last week, had been dropped.

While few details of the Franco-German deal emerged, the sources said it would include private sector involvement that should not cause either a default or selective default of Greek debt, a red line for the ECB.

The risk premium investors demand to hold peripheral euro zone government bonds rather than benchmark German Bunds fell on Thursday on news of the Franco-German agreement.

"There are huge expectations something will be done... the big disappointment could come from how quickly they can implement things. They can agree principles but implementation will take a long while," said Peter Schaffrik, a strategist at RBC Capital Markets.

The 115 billion euro second Greek rescue package would involve both more official funding from the euro zone rescue fund and the IMF and a contribution by private sector bondholders on which two senior bankers will make a presentation to leaders on Thursday, the sources said.

Baudoin Prot of BNP Paribas, the French bank with the biggest exposure to Greek debt, and Deutsche Bank chief executive Josef Ackermann, chairman of the International Institute of Finance, a banking lobby that has led talks among bankers, will attend, banking sources said.

The leaders are due to meet at 1100 GMT but the start could well be delayed as euro zone sherpas work to thrash out details of an agreement, officials said.

The aim is to make Greece's debt more sustainable and prevent fears of a disorderly default from poisoning access to the bond market for bigger states such as Italy and Spain.

SUPPLEMENT

The new bailout would supplement a 110 billion euro ($156 billion) rescue plan for Greece launched in May last year. Ireland and Portugal have since received similar rescues and Italian and Spanish debt has come under attack this month, spreading the crisis to countries that are too big to save with the EU's current fire-fighting instruments.

Worried about the impact on financial markets and wary of angering their own taxpayers, euro zone governments have struggled for several weeks to agree on major aspects of the plan, especially a contribution by private sector investors.

The euro rose moderately against the dollar in response to the Franco-German announcement. Providing fresh money to Greece and arranging for commercial banks to participate could face legal and technical obstacles.

The head of the European Commission, Jose Manuel Barroso, warned on Wednesday that the global economy would suffer if Europe could not summon the political will to act decisively on Greece.

"Nobody should be under any illusion: the situation is very serious. It requires a response, otherwise the negative consequences will be felt in all corners of Europe and beyond," Barroso told a news conference.

Britain's finance minister George Osborne, in an interview with the Financial Times published on Thursday, said failure could produce an economic crisis as serious as the recession which followed the global credit crash of 2008.

NOT CLEAR

Barroso said a solution to Greece's problems must include steps to ensure the sustainability of Greek public finances, private sector involvement in funding for Athens, more flexible use of the euro zone's bailout fund, repair of the region's banking system, and liquidity to keep the Greek economy going.

It was not clear how many of these steps were included in the Franco-German accord.

Four competing proposals have been circulating for private sector involvement: a rollover of Greek government bonds as they mature, a swap of bonds for debt with longer maturities, a buy-back of Greek debt at a discount to its face value, and a tax on European banks.

Germany and France had been at odds on these proposals, with Berlin promoting a bond swap and France suggesting a rollover or a tax. The ECB had complicated the argument by opposing any step that might cause credit rating agencies to declare Greek debt in default.

The IMF, whose new head Christine Lagarde will also attend, has told euro zone leaders they should put more money into their bailout fund, the 440 billion euro European Financial Stability Facility, and let it buy government bonds of weak states on the secondary market. Investors also hope it will be permitted to extend precautionary credit lines to countries at risk.

Germany has previously blocked allowing the EFSF to buy bonds, which would require changes in the fund's rules that would have to be ratified by national parliaments, and could fall foul of critics in Germany, the Netherlands and Finland.

Regardless of the details of the Franco-German accord, Thursday's summit is very unlikely to mark a complete resolution of the crisis, as Merkel herself acknowledged earlier this week.

A second bailout may simply keep Greece afloat for a number of months before a tougher decision has to be made on writing off more of its debt.

In any case, many economists believe the only way out of the euro zone's debt crisis in the long run may be closer integration of national fiscal policies -- for example, a joint euro zone guarantee for countries' bonds, or issuance of a joint euro zone bond to finance all countries.

Germany has firmly ruled out such steps, but Osborne said the second Greek bailout would only be a step toward a necessary fiscal union in the euro zone.

(additional reporting by Emmanuel Jarry in Berlin, Philipp Halstrick in Frankfurt, Emilia Sithole-Matarise in London; writing by Andrew Torchia and Paul Taylor, editing by Janet McBrde) ============================== EU bank stress-test winners still short of capital Most European banks passed the exam, at least on a headline level. But the accompanying disclosures make them look less robust up close. Investors can use the new clarity to push for extra capital buffers. These would help lenders cope with the risks of euro zone deflation. Italy’s bank debacle could be useful for Renzi Italian banks’ poor showing in Europe’s stress test has sparked protest from the Bank of Italy. But for reforming Prime Minister Matteo Renzi, shocks to the system aren’t unhelpful. He can use the mess to reform ailing lenders so they can support the shaky economy. Breakingviews TV: Stressed out? Dominic Elliott and George Hay say Europe’s bank review has done just enough to avoid looking like a whitewash. Watch the view Europe's bank stress test warrants a narrow pass The analysis has enough nasties to avoid appearing a whitewash. And it has a big loser: Monte dei Paschi is a massive 2 bln euros short, amid other predicted failures. But while the bigger lenders passed and the air has been cleared, it may yet fail to spur credit supply. World's oldest bank faces radical treatment Monte dei Paschi will struggle to plug its 2 bln euro stress-test hole and stay independent. Investors in the last cash call got burned. The clean solution would be a takeover. But with buyers in short supply, a breakup may be required. It’s a big setback for the Bank of Italy. Follow Breakingviews on Facebook | Follow Breakingviews on Twitter Introductions If you have received this email from a Breakingviews user and would like to trial our service free, please click here Help If you are having problems with story links or for general help please contact us: EMEA/UK: +800 738 837 70 or +44 20 7542 5565 Americas: +1-800-738-8377 Asia: +612 9321 8140 Client Support: +800 8727 8326, rm.clientsupport@thomsonreuters.com © Thomson Reuters 2014. All rights reserved. TOP. The contents of this email, either in whole or in part, may not be reproduced, copied, or distributed without prior written permission of the publishers. Action will be taken against companies who ignore this warning. Reuters Breakingviews email alerts are provided to you for free as part of your Thomson Reuters subscription. To stop receiving them, click here . Please note this may take up to 24 hours. To find out more about Reuters Breakingviews click here =============================== ECB fails 25 banks in health check but problems largely solved Sun, Oct 26 16:18 PM EDT image 1 of 2 By Laura Noonan and Eva Taylor FRANKFURT (Reuters) - Roughly one in five of the euro zone's top lenders failed landmark health checks at the end of last year but most have since repaired their finances, the European Central Bank said on Sunday. Painting a brighter picture than had been expected, the ECB found the biggest problems in Italy, Cyprus and Greece but concluded that banks' capital holes had since chiefly been plugged, leaving only a modest 10 billion euros ($12.7 billion) to be raised. Italy faces the biggest challenge with nine of its banks falling short and two still needing to raise funds. The test, designed to mark a clean start before the ECB takes on supervision of the banks next month, said Monte dei Paschi (BMPS.MI) had the largest capital hole to fill at 2.1 billion euros. The exercise provides the clearest picture yet of the health of the euro zone's banks more than seven years after the eruption of a financial crisis that almost bankrupted a handful of countries and threatened to fracture the currency bloc. While 25 of the euro zone's 130 biggest banks failed the health check at the end of last year with a total capital shortfall of 25 billion euros, a dozen have already raised 15 billion euros this year to make repairs. A recent investor survey by Goldman Sachs found they believed the ECB ought to ask lenders to raise an additional 51 billion euros of capital for the tests to be credible. Although investors may take heart, it remains to be seen whether the exercise can spur banks to lend more as the region's economic growth stutters to a virtual halt. (Spur: A short or stunted branch of a tree.1. To ride quickly by spurring a horse. 2. To proceed in haste.) European Central Bank Vice President Vitor Constancio said the results could encourage banks to lend. "There is some pick up (in demand), but it is still slight," Constancio told Reuters. "All this now can really start to change the environment and we hope it will also change the reality." Alongside Italy, regulators said three Greek banks, three Cypriots, two from both Belgium and Slovenia, and one each from France, Germany, Austria, Ireland and Portugal had also missed the grade as of end-2013. Analysts generally gave the results a cautious welcome, saying they marked the beginning rather than the end of a banking clean-up in Europe. "I consider the stress test as an important partial success, which will help reduce uncertainty," said Marcel Fratzscher, president of Germany's DIW economic institute. "However, important challenges remain unsolved. The stress test alone will not end the credit crunch for small and mid-sized companies in Southern Europe." Some were more critical. "This seems as if it has been pretty unstressful," said Karl Whelan, an economist with University College Dublin. "The real issue is the size of the capital shortfall and that is very, very small. I don't feel a whole lot more reassured about the health of the banking system today than last week." The exercise nonetheless provided a snapshot of banks' vital statistics and forced them, for example, to revise the amount of risky loans - which have not been serviced in 90 days - upwards by 136 billion euros to 879 billion. CLEAN-UP AHEAD The exercise, which saw officials trawl through more than 40 million individual bank figures, had two parts – a strict review by the ECB of assets such as loans, followed by a wider test of how banks would cope with a new economic crash. It is the fourth attempt by Europe to clean the stables of its financial sector and has been billed as much the most rigorous. Previous efforts failed to spot problems, giving lenders in Ireland a clean bill of health shortly before a banking crash drove the country to the brink of financial collapse. "It is credible," said Nicolas Veron of Brussels think tank Bruegel. "But it is only the start of a longer sequence of cleanup that will extend well into 2015." The ECB's passmark was for banks to have high-quality capital of at least 8 percent of their risk-weighted assets, a measure of the riskiness of a banks' loans and other assets, if the economy grows as expected over the next three years, and capital of at least 5.5 percent if it slides into recession. Banks with a capital shortfall will have to say within two weeks how they intend to close the gap. They will then be given up to nine months to do so. UNBLOCKING LENDING The ECB staked its reputation on delivering a thorough assessment in an attempt to draw a line under years of financial and economic strife in the bloc. For many banks, the biggest impact of the tests was not in identifying capital holes but in finding that their assets, such as loans, had been overvalued. In total, the ECB said banks had been valuing their loans and assets at 48 billion euros more than they are really worth. This was because they had not recognised 136 billion euros of bad loans. That accounted for 11 billion of the 25 billion euros banks were collectively short of at the end of last year. It also eroded 37 billion euros of capital amongst the banks that passed. Among the major listed banks, the biggest hits were to Greece's Piraeus bank, whose core capital fell by 3.7 percentage points after the ECB adjusted the bank's capital to reflect the new asset valuations. Monte dei Paschi's capital was reduced by almost a third. There was also a big impact on Austria's Erste Bank. The adjustments put many banks in an uncomfortable position. Thirty-one had core capital below the 10 percent mark viewed by investors as a safety threshold, while a further 28 were had ratios just 1 percentage point above. The ECB will not immediately force lenders with overvalued assets to take remedial action but they will have to hold more capital eventually, leaving less room to expand, lend or pay dividends. For overall lending, the more fundamental question is whether the demand for credit is there in a moribund euro zone economy. (Moribund: 1. Approaching death; about to die. 2. On the verge of becoming obsolete: moribund customs; a moribund way of life.) (Additional reporting by John O'Donnell and Paul Carrel in Frankfurt, Huw Jones, Steve Slater and Clare Hutchison in London, Carmel Crimmins in Dublin and Michelle Martin in Berlin. Writing by Mike Peacock and John O'Donnell, editing by Alexander Smith and David Evans) ======================================