Sunday, October 26, 2014

ECB Stress Test Results Released October 26 , 2014 - 25 Banks fail , spin begins immediately ... Keep focused if you're " All Along The WatchTower "

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ECB Stress Test Fails To Inspire Confidence Again As Euro Stocks Slide After Early Rally; Monte Paschi Crashes

It started off so well: the day after the ECB said that despite a gargantuan €879 billion in bad loans, of which €136 billion were previously undisclosed, only 25 European banks had failed its stress test and had to raised capital, 17 of which had already remedied their capital deficiency confirming that absolutely nothing would change, Europe started off with a bang as stocks across the Atlantic jumped, which in turn pushed US equity futures to fresh multi-week highs putting the early October market drubbing well into the rear view mirror. Then things turned sour. Whether as a result of the re-election of incumbent Brazilian president Dilma Russeff, which is expected to lead to a greater than 10% plunge in the Bovespa when it opens later, or the latest disappointment out of Germany, when the October IFO confidence declined again from 104.5 to 103.2, or because "failing" Italian bank Monte Paschi was not only repeatedly halted after crashing 20% but which saw yet another "transitory" short-selling ban by the Italian regulator, and the mood in Europe suddenly turned quite sour, which in turn dragged both the EURUSD and the USDJPY lower, and with it US equity futures which at last check were red.

Just to be clear, the claim that *as of now* 150 major zone banks only have a €9.5bn capital shortfall is ludicrous.

Even Goldman isn't buying it: "Shortfall below expectations, €25 bn pre- and €9 bn post mitigations vs. €38-51 bn expected range"

The Chart That Crushes All Credibility Of The ECB's Latest Stress Test

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While we would be the last to comment on the ECB's laughable forecasting capabilities, we do have to note that there is a bit of a disconnect between the ECB's projections of Eurozone inflation for 2014, 2015 and 2016 as presented in its March, June and September meetings...

... and what the market is currently anticipating based on 5Y5Y forwards which as we noted two weeks ago, recently hit an all time low.

The reason we bring this up, is because just after the latest "most serious, most confidence inspiring" stress test was revealed, that perpetual troublemaker, the head of Germany's IFO Institute, Hans-Werner Sinn, who relentlessly refuses to drink the European Kool Aid, pointed out something rather stunning. According to Bloomberg, in an emailed statement, Sinn said that "ECB avoided modelling a deflation scenario for southern Europe which explains why the capital shortfall was so small for many banks."
Additionally Sinn said that the change in relative prices that includes inflation in north and deflation in south is “unavoidable” if southern European countries are to regain competitiveness without euro-zone inflation. He added that regaining that competitiveness solely via inflation in north - something Germany clearly is not too crazy about - would violate ECB mandate. HIs conclusion: the AQR/stress test implied inflation for all of euro zone to prevent too many banks from failing test.
We will leave what the ECB implied aside for the time being, and instead merely focus on his claim: if indeed the ECB completely ignored to model deflation as a possible outcome, then it makes an evengreater mockery of the ECB's pet "confidence building exercise" within the financial community.
And sure enough, within the massive 178-page Stress Test document, there is a "whopping" 4 mentions of the word inflation (deflation appears just once).
Here is what the "Stress Test" does say about inflation:
... while the adverse scenario does not strictly embody a prolonged deflationary environment [ZH: because it clearly does not embody any deflationary environment], it does entail material downward pressures on inflation. Thus, the scenario leads to annual inflation rates for the euro area below the baseline rates by 0.1 percentage points in 2014, by 0.6 percentage points in 2015, and by 1.3 percentage points in 2016. The implied adverse inflation rates amount to 1.0% in 2014, 0.6% in 2015 and 0.3% in 2016.
Which brings us to the chart that renders the ECB's entire exercise in goalseeked stress meaningless and with zero credibility: presenting the ECB's "worst-case" inflation assumptions.
What is the common with the forecast inflation bars shown above? They are all positive, meaning wven in the worst case scenario, the ECB does not think deflation is even a possibility! (and whatever you do, don't look at the 2014 "worst-case" inflation forecast and compare it to the ECB's revised September forecast).
So just as the Troika "never modeled" a Grexit from the Eurozone, and just as the ECB "never modeled" for the Euro to be replaced by its predecessor sovereign currencies - who can forget Mario Draghi's famous "There is No Plan B" speech... which turned out to be glaring lie- simply because the mere assumption of such an outcome would leadto its reality in a self-fulfilling prophercy, so the ECB, in its allegedly most stringent stress test yet... "never modeled" the one most likely outcome for the Eurozone: deflation!
Ironically, for once journalists did not give the ECB a hall pass, and at the press conference for the Stress Test results, there was this exchange with the ECB's Constancio:
My question would be on how credible these tests are. Looking at the adverse scenario, you haven't even included deflationYou have not included an interruption in gas imports to Europe. You have not included full-on sanctions on Russia. So please elaborate and convince us.

Constâncio: The scenario for the stress test was published earlier in the year, so some of the things you mentioned would not have been considered. But indeed, what was considered is a severe shock being the growth of other countries. If you look to the scenario, you see that for the US, there is also a big deceleration of growth which is part of the scenario and also for other countries that are the markets of the euro area. So that is embedded in those assumptions of indeed a big drop in external demand directed to the euro area. That's the first point.

The scenario of deflation is not there because indeed we don't consider that deflation is going to happen.
So.... wait a minute.
Just because the ECB, in all of its brilliance - brilliance which apparently was not brilliant enough to realize that there is, first, not nearly enough ABS in the private market for the ECB to monetize, to bring its balance sheet up by €1 trillion and, second, as its Reuters trial balloon revealed, an ECB monetization of corporate bonds would amount to... a negligible €10 billion per month does not think a scenario is possible is precisely the necessary and sufficient reason to not include it in the stress test.
Uhmm, guys in Frankfurt: here's a tip - the quote-unquote Stress Test, and especially its adverse scenario, is precisely there to "assume" everything that you don't consider is going to happen! Because otherwise, there is no need for a stress test: one can just wait every quarter and watch as the ECB's forecast grinds lower and lower until deflation becomes the norm. A norm which the ECB "didn't consider is going to happen."
Because how do you rebuild confidence in a system in which the market is telling you deflation is the most likely outcome, and yet you fail to even model for it because, drumroll, you want to rebuild credibility, however by only modeling what you, and not the market, "consider will happen"!?
Oh, and the final reason why one can stick a fork in the ECB's latest attempt to "rebuild confidence", is that when preparing to report its stress test results, the ECB would at least look at what Eurostat revealed on October 16 regarding European inflation. Or rather deflation. For those who missed it, such as the entire ECB governing council apparently, 8 countries in Europe are already in outright deflation, including, but not limited to the bulk of the PIIGS, namely Spain, Italy, and Greece.
That said, despite the complete humiliation that was the ECB's latest stress test, we commend the ECB for working on a Sunday in releasing the stress test and actually holding a press conference on a day when the entire deflationary continent is relaxing in the park, drinking an espresso and smoking a cigarette.

ECB Announces Stress Test Results: Here Are The 25 Banks That Failed

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As was leaked on Friday, when the market surged on news that some 25 banks would fail the ECB's third stress test (because in the New Normal more bank failures means more bailouts, means the richer get richest, means more wealth inequality), so moments ago the ECB reported that, indeed, some 25 banks failed the European Central Bank's third attempt at collective confidence building and redrawing of a reality in which there is about €1 trillion in European NPLs, also known as the stress test.
The ECB's results as summarized by the central bank:
  • Capital shortfall of €25 billion detected at 25 participant banks
  • Banks’ asset values need to be adjusted by €48 billion, €37 billion of which did not generate capital shortfall
  • Shortfall of €25 billion and asset value adjustment of €37 billion implies overall impact of €62 billion on banks
  • Additional €136 billion found in non-performing exposures
  • Adverse stress scenario would deplete banks’ capital by €263 billion, reducing median CET1 ratio by 4 percentage points from 12.4% to 8.3%
The central bank's punchline: "[the] Exercise delivers high level of transparency, consistency and equal treatment. Rigorous exercise is milestone for the Single Supervisory Mechanism starting in November."
And this is what it's all about from Vítor Constâncio, Vice-President of the ECB. "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." Or, as Bloomberg called it, "The ECB has staked its reputation on Monday's stress test results"... what reputation?
As for the 25 bank failures in question, they are shown below, with failures concentrated among Italian banks, with nine banks unable to "pass", and Greek and Cypriot banks, with three apiece. Among the largest is Banca Monte dei Paschi di Siena, Italy’s third-largest lender, which faces an outstanding capital hole of about €2.1 billion. While the ECB would have loved to have Monte Paschi pass, the bank has been far too many times near death to credibly squeak by on whatever "reality-bending" terms.
Amusingly, some 18 months after the entire Cypriot financial system collapsed and the country's banks had to be bailed in, the Bank of Cyprus which failed the test as per the above, said it passes ECB stress test assessment following its EU1b share capital increase.
"The positive result of the Comprehensive Assessment reaffirms the solid capital position of the Bank, even under the most extreme, severe theoretical stress conditions. It also reflects the pro-activeness of the Group in raising adequate capital in advance of the Comprehensive Assessment”: Dr Christis Hassapis, BOC Chairman says in statement.
Remember: confidence... confidence.... confidence...
Some quick observations: not a single major bank failed the stress test and the cumulative capital shortfall among the 25 failures is precisely €25 billion, less than the €27 billion shortfall reported during the 2011 stress test when 20 banks failed, and when Banco Espirito Santo, Dexia and Bankia all passed with flying colors. Oh, and just in case it was lost the first time, the Bank of Cyprus supposedly passed.
According to the WSJ, the number of failures, and the depth of the cumulative capital shortfall, was slightly larger than what analysts and investors expected European regulators to identify during their “stress tests” of 150 of the continent’s leading banks.
The ECB said the banks that failed have taken steps this year to substantially boost their capital buffers. Twelve of the 25 failing banks already have covered their capital shortfalls, raising a collective €15 billion this year. That leaves another €9.5 billion that banks still need to come up with.

Banks that received failing marks, and which haven’t already filled their capital holes, now have two weeks to explain to regulators how they plan to overcome the deficits.

As part of the exercise, the ECB also reviewed the quality of bank assets to determine whether they were accurately valued. That process resulted in banks being forced to reduce the value of their assets by a total of €48 billion, the ECB said. The central bank also identified a total of €136 billion of troubled assets, known as non-performing exposures, sitting on the balance sheets of the eurozone banks.
More amusing, among the banks that failed, one after another are already lining up to comment that they already are "fixed." Some examples:
  • BCP Says No Need to Plan Capital Increase, Forced Asset Sales. The board is confident that measures already decided in 2014 fully cover the capital shortfall resulting from the adverse scenario of ECB’s stress test, Banco Comercial Portugues says in regulatory filing. So nothing more has to be done.
  • Muenchener Hyp has aggregated capital shortfall for the Comprehensive Assessment of 229 million euros. Muenchener Hyp raised 351 million euros of capital instruments eligible as CET1 capital in the year to Sept. 30. So nothing more has to be done.
  • Caisse De Refinancement De L’Habitat had adjusted common equity Tier 1 ratio of 5.74% in the ECB’s asset quality review, versus a pass mark of 8%, the Bank of France says. CRH has already raised sufficient capital to make up the shortfall, Bank of France says.  CRH is case of “shortfall but cured,” Bank of France Governor Christian Noyer says. So nothing more has to be done.
  • Polish lender Getin Noble says has already filled capital gap after tests. Getin Noble says needs no capital increase after AQR tests as it has already filled capital deficit shown in asset review tests, Chief Executive Officer Krzysztof Rosinski speaks with reporters by phone today. So nothing more has to be done.
  • HSH Nordbank, the world’s largest maritime lender with EU20b shipping portfolio, has CET1 ratio of 6.1% in adverse scenario of ECB’s stress test vs pass mark of 5.5%. HSH says results boosted by guarantee provided by owners, states of Hamburg and Schleswig-Holstein, which was raised to EU10b from EU7b in 2013. So nothing more has to be done.
  • Axa Bank has aggregated capital shortfall for the Comprehensive Assessment of EU200.2m, ECB says. Axa Bank raised EU135m of capital instruments eligible as CET1 Capital in the year to Sept. 30, ECB says. Axa Bank also issued EU90m contingent convertible notes to parent Axa, for total capital increase of EU225m, Axa says in separate e-mailed statement. So nothing more has to be done.
And the punchline: while the three Greek banks failed, they all passed... on a dynamic basis. In other words, if one excludes reality, and replaces it with this curious state known as dynamism, all is well.So nothing more has to be done.
So if none of the major banks were impacted, and if the vast majority of failures don't have to do a thing, what was the point of the stress test? Here is WSJ's take:
European officials say this year’s tests are the strictest yet. They were preceded by ECB officials combing through the balance sheets of 130 banks, trying to gauge whether they accurately valued loans and other investments and forcing some banks to write down problematic assets such as overdue mortgages and corporate loans.

European Union officials and economists hope the publication of the test results, as well as the release of more than 1 million financial data points about the banks,will improve confidence in the industry. That, in turn, should make it easier for banks to issue affordable loans to household and business customers, spurring much-needed economic growth.
Wait, the complete collapse in demand for bank loans in Europe (at least those loans that won't soon be purchased by the ECB), is a function of banks not having confidence in each other? So all that was preventing Europe's record unemployed consumers from levering up had everything to do with fear that their lender would go insolvent tomorrow and nothing with the youth having no employment prospects, and negligible income for everyone else? Got it.
And now with bank confidence all restored and stuff, watch as this chart of European loan creation goes vertical, right?

Big German Banks Judged Healthy Under Stress Test

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10/26/2014 | 08:38am US/Eastern

   By Eyk Henning 
FRANKFURT--Germany's 25 largest banks are sufficiently capitalized to weather a potential crisis, a health-check of the European industry from the European Central Bank and the European Banking Authority showed Sunday. "Germany's banks are well capitalized even in a very difficult economic environment," Germany's financial watchdog BaFin said Sunday.

In a stress scenario simulated by the EBA, Deutsche Bank AG's equity capital ratio, a measure of how well banks can absorb losses, fell to as much as 8.78%, while Commerzbank AG would still record 6.9%. Both are above the 5.5% minimum threshold required by the authorities, but below the 9.1% that Germany's lenders recorded on average, data from BaFin showed.

The test measures how well lenders can weather differing degrees of economic downturn based on their accounts at the end of 2013 plus a summary of capital raised until Sept. 30 this year.

"The [test] reaffirms that, even in scenarios of severe market stress, our capital base would substantially exceed regulatory capital requirements," Deutsche Bank's co-chief executives Juergen Fitschen and Anshu Jain said.
Commerzbank's CEO Martin Blessing called the bank's result "good", adding it is a testimony to the successful reorganization of the lender in past years.

Analysts have said before that Commerzbank could struggle to meet the 5.5% threshold banks are required to achieve in an adverse stress scenario and that Deutsche Bank's capital cushion might look thin without taking the capital increase into account.

According to BaFin, DZ Bank, the umbrella institute for a large part if the country's co-operative banks, was the weakest capitalized lender of Europe's largest economy with a ratio of just below 6%.

Muenchener Hpothekenbank, a small real-estate lender, overcompensated its 229-million-euro ($290 million) capital shortfall based on accounts at the end of 2013 with a capital increase of roughly EUR400 million.

Odds and Ends .....

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A Furious Albert Edwards Lashes Out At Central Bankers: "Will These Morons Ever Learn?"

Albert Edwards is angry, and understandably so: almost exactly two weeks after warning readers to "sell everything and run for your lives" and the market was on the verge of its first correction in years, several powerful verbal interventions by central banks from the Fed, to the BOJ to the ECB have staged yet another massive rebound which has nearly wiped out all the October losses. Central-planning aside (and ask how much the USSR would have wished for central planning to indeed have been "aside") we share his frustrations, almost to the point where we would reiterate word for word Edwards' furious outburst, as follows: "Simply put, the central banks for all their huffing and puffing cannot eliminate the business cycle. And they should have realised after the 2008 Great Recession that the longer they suppress volatility, both economic and market, the greater the subsequent crash. Will these morons ever learn?"

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40% Of Eurozone Banks Are In Bad Shape

130 banks are being tested. 12-18 will fail. And on top of that, almost a third of 130, that’s over 40, will pass while still getting their feet wet. That means anywhere between 40% and 44% of Eurozone banks either fail or are in bad shape. If 40% of your banks are either dead in the water or barely floating, I’d say you have a major problem. We all know our world, be it politics or economics, consists almost exclusively of spin these days, but in the face of these numbers we very much wonder how many people will be willing to bet their own money that Europe can get away with another round of moonsmoke and roses come Monday.

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Wall Street Is One Sick Puppy - Thanks To Even Sicker Central Banks

Last Wednesday the markets plunged on a vague recognition that the central bank promoted recovery story might not be on the level. But that tremor didn’t last long. Right on cue the next day, one of the very dimmest Fed heads - James Dullard of St Louis - mumbled incoherently about a possible QE extension, causing the robo-traders to erupt with buy orders. And its no different anywhere else in the central bank besotted financial markets around the world.Everywhere state action, not business enterprise, is believed to be the source of wealth creation - at least the stock market’s paper wealth version and even if for just a few more hours or days.The job of the monetary politburo is apparently to sift noise out of the in-coming data noise - even when it is a feedback loop from the Fed’s own manipulation and interventions.