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%
Goldman’s quick take:
- AQR: 16 banks fail (87% pass rate); €5 bn shortfall identified (€36 mn post mitigations).
- Test: 24 banks fail (80% pass rate); €25 bn shortfall identified(€9 bn post mitigations).
- Not all banks failing the AQR/Test overlap: Cumulatively, therefore, the two exercises yield a capital shortfall of €25 bn needing to be addressed by 25 banks. Mitigating actions result in the figures falling to €9 bn and 13 banks.
- Pass rate lower, shortfall below expectation:  The number of failing banks exceeds investors’ expectations as gauged by our market survey (“Surveyâ€); the capital shortfall looks lower.
- Failing banks: 25 vs. 8 (middle point of the expectation), for an 81% pass rate.
- Capital shortfall: €25 bn pre- and €9 bn post mitigations vs. €38-51 bn expected range.
The important part being that not even Goldman is buying the reported negligible capital shortfall.
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 VÃtor 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?
