The Bankwatch

Tracking the consumer evolution of financial services

Posts Tagged ‘stress tests

“We’ve already blown past the worst-case scenario on unemployment” | repeat stress tests

As banks rush to repay TARP money, driven by the desire to remove government control rather than any reflection of improved financial standing, here is a sobering statement from Elizabeth Warren.  Just as GM didn’t ‘get it’ in terms of the world will look like on the other side of this recession, many banks appear to have similar blinders.  Instead of arguing that they are not in bad shape and that they are secure, why not make changes now that display the recognition that the future is not going to be anything like the past.  I say again, and blame the politicians for the use of the word recovery – recovery does not mean a return to 2007.

Repeat stress tests right now | MSNBC

The Congressionally-appointed panel overseeing the Troubled Asset Relief Program (TARP) recommends running again the stress tests on US banks, as economic conditions have worsened, its chair, Harvard University professor Elizabeth Warren, told CNBC Tuesday.

“We actually make recommendations to do it all over again right now,” Warren told “Squawk Box.”

“We’ve already blown past the worst-case scenario on unemployment,” she added.

Yahoo Japan notes the expected repayment of $68 Bn from 10 banks.

金融不安後退 大手10社公的資金返済へ

6月10日1時53分配信 産経新聞

Reported by Nobuyo Henderson

Written by Colin Henderson

June 9, 2009 at 12:24

Posted in Profitability

Tagged with , , ,

Bank of America Needs $33.9 Billion | NYT

As predicted yesterday, the amount of capital the banks need is far in excess of the amounts they were negotiating.

This news just in from the NYT confirms what had to be the case.  If we do the math based on project bad debts, it had to be in the $20bn + range for the big banks.  Similar results will apply to Wells, Citi,  PNC and others in the group of 19.  Watch out for the stock market tomorrow.  Reality bites.

Bank of America Needs $33.9 Billion, U.S. Determines

The government has determined that Bank of America will need
$33.9 billion in capital, according to an executive at the

Written by Colin Henderson

May 5, 2009 at 22:32

Where are the bank visionaries when we need them?

As we watch for bank stress test results in the US and other countries efforts to deal with Banks’ asset valuation and capital levels, its useful to keep a track on the economic back drop, and assess the bank’s efforts to address their real problem, which is over-valued assets.

The US stress tests specifically address the impact on banks under certain sets of future assumptions for economic growth and stability.

Spring forecasts 2009-2010 | European commission

The Commission forecasts a sharp contraction of the EU economy by 4% in 2009 (relative to a positive growth of 0.8% in 2008). Almost all EU countries are severely hit by the worsening of the financial crisis, the sharp global downturn and ongoing housing market corrections in some economies. However, with the impact of fiscal and monetary stimulus measures kicking in, growth is expected to regain some momentum in the course of 2010 (annual growth forecast for 2010 stands at -0.1%). Figures are essentially the same for the euro area as for the EU as a whole. These figures represent a significant downward revision compared to the autumn forecast and the interim forecast of January 2009.

spring-forecast-2009-publication15048_en [pdf]

So far the news is not good.  We have US, Japan, and now EU all noting significant downward adjustments to their forecast for 2009.  Magically, they all seem to agree 2010 will be just fine.  2010 aside, the consensus for the big three are 2009 GDP drops in the 4 % – 6+ % range.

Here is an extract of the baseline forecasts used by the Stress tests, contained in their methodology document for SCAP (Supervisory Capital Assessment Progam).

SCAP Economic Assumptions

The short view is that the assumptions for GDP growth in 2009 are approximately 1/3 of the latest forecasts.  Put another way 2009 is going to be 3 times worse than the forecast used in SCAP.   This is only May, so one can only assume that on a probability scale the opportunity for additional downward revisions are as possible as any other prediction at this stage.

The debate amongst BofA, Citi and the government on whether they ought to raise $5Bn in capital is ridiculous, and counterproductive.  As the economic forecasts show, the amounts required are not going to be debated in the $1 Bn range – this needs vision that produces 10’s or 100’s of billion in improvement such that the organisation can leap ahead of the economic crisis and look out 10 years, not 1 month, which seems to me to be the current landscape for banks.

Incidentally, to place $5Bn in perspective, Merrill Lynch paid out $3.6 bn in bonuses at the end of 2008.  Geithner should not even take a phone call from any bank who wishes to discuss anything thats less than $20 bn.  A debate over $5bn is ludicrous.

All this to say, that banks are stuck in a classic rat hole and surrounded.  Which bank and which leader will step up with vision for the future that carries banks on beyond 2011?

Relevance to Bankwatch:

Banks need to take a leaf out of Sergio Marchionne, Fiat chief executive’s book.  He is in Germany this morning proposing a deal that will take advantage of the current climate, and look to take advantage of infrastructure provided by Vauxhall, Chrysler, Opel and Fiat to structure an effective platform around car types that consumers actually want and need, ie smaller, cheaper and more efficient.  Already he is getting positive reaction to his plan, and these meetings only took place today (Monday).

He hopes to complete the transaction by the end of May, and list shares of the new company, tentatively called Fiat/Opel, by the end of the summer.

Mr Marchionne said Fiat and Opel would reap synergies of €1bn a year by merging their small B and midsize C segment car platforms, and absorbing Fiat’s ultra-small A platform and Opel’s upper-middle D platform.

Note the timing – he is going to do this in one month. This new conglomorate will involve hard decisions and layoffs.  This is the hard reality of the adjustment required for the new economy.  Getting through the crisis is not a return to 2007.  It is a fundamental shift to a smaller and different economy.

Where are the bank visionaries now?  Are they becoming so bogged down worrying about beaurocratic discussions with their new government masters and defending bonuses and perks that they have lost sight of the real goal?

Written by Colin Henderson

May 4, 2009 at 09:09

The US Government displays extraordinary weakness with Banks

This is turning into something of a joke.  The whole point of the ‘stress tests’ was to objectively assess the capital requirements of the Banks’.  Surely no-one could have imagined any outcome other than a requirement to raise more capital.  The only debate might be amount and over what period.

In any event there can be no reason to delay the production of the results.  The market is living in the false belief that the government will not hold the banks feet to the fire, at least judging by the stock market.  If we do not get this over with, and get the facts out, the Governments’ hands will be tied even more to full nationalisation as the only way to avoid another market crash.

Bank objections delay stress tests

Citi, one of the biggest victims of the crisis that has already been bailed out three times by the government, is believed to have been told by regulators that it needs more than $5bn in fresh capital, while BofA might need to convert $45bn in government preferred shares into common equity.

Written by Colin Henderson

May 2, 2009 at 12:57

Posted in Uncategorized

Tagged with ,

The power of positive thinking from Deutsche Bank

This is a very sensible article by Neil Hume at the FT.  He notes the extraordinary growth in bank stock prices since the infamous CitiBank memo in March, wherein he basically pronounced the worst as over, because he had removed the bad people, was instituting new processes, and working with Government.

What struck me is this quote from an analyst at DB (emphasis added)

On London: Banks’ rehabilitation could take time

Add it all up, and the reason banks have rallied is investors are no longer worried about nationalisation and are prepared to look through two years of rising bad debts and impairment charges to a recovery. “There is increased appetite from the market to accept 2009 and perhaps 2010 as lost years from a bank profit perspective and buy stocks for post-recession earnings,” says Jason Napier of Deutsche Bank.

Hmmm…  all I can say is I don’t think so.  Since when is the market willing to wait beyond 1 quarter, let alone 2 years?  Such thinking is precisely the kind of thing that pressed the exuberance of the last few years before this crisis – the ability to rationalise perverse events with thinking that sustains the perverse events.

As Neil points out there is much news still to come:

  • more stress test results
  • more economic events – just this week it has become clear that the projections on the economies of all advanced economies were overstated by orders of magnitude.
  • additional regulation – still to come

In my view, the impact of deleveraging has not yet hit the Banks’ of North America or UK.  Their capital bases are razor thin, with extraordinary levels of debt to equity.  Just one event can wipe that out.  It is painfully strange that the US Fed as again yesterday deferred the announements on the stress tests of the 19 banks’, 19 banks’ who as far as I can determine have yet to be named.  If the news was good one might assume the announcements would have come back in March?  The jury remains out.

Written by Colin Henderson

May 2, 2009 at 12:45

SIGTARP report and report to Congress on stress tests | Apr 19th, 2009

The only word for this document is breathtaking.  It is breathtaking because it touches a large amount of the US economy, and the largest businesses in the economy.  It deals with:

  1. Banks
  2. Auto sector
  3. executive compensation
  4. Executive replacement
  5. ‘luxury’ purchases, (eg corporate jets)
  6. SIGTARP administration

And the detail contained in the 247 pages is work that is substantially net new since January this year.  I say this in defence of Geithner, and his quiet approach at first.  He has been rather busy.  But to the report to Congress today.

The report sigtarp-april2009_quarterly_report_to_congress:   SIGTARP site.

Summary of Geithners testimony at FT. He descirbes the Stress test results as mixed.  A quick review of the report tells me that the answer is not captured in a sentence, so have to dig further to find out what mixed means.

Tim Geithner acknowledged that evidence of improved liquidity as a result of the bank bail-out was “mixed”, but defended the $700bn troubled assets relief programme against charges that it gave an easy ride to the financial sector.

Appearing before a Congressional oversight panel on Tuesday, the Treasury secretary said interbank lending, corporate issuance and credit spreads showed signs of a thaw in credit. “To date, frankly, the evidence is mixed,” he said.

Written by Colin Henderson

April 21, 2009 at 12:42

Posted in Uncategorized

Tagged with , , ,

Bank capital levels around the world are low and sufferring

The IMF report had a spreadsheet in the appendix with bank capital levels around the world.

While it has individual countries, I summarised into this chart.  The data shows Capital as a percentage of Assets so higher is good, lower is bad.

Note the negative trends in most except Canada, and this is based on the latest data to end of 2008.  Use the thumbnail for a larger version that is clearer.



Written by Colin Henderson

April 21, 2009 at 11:46

Posted in regulation

Tagged with , ,

Transparency pledge in bank stress tests – now May 2009

Confusing messages coming out on the timing of the Bank stress tests – now expected May.

Transparency pledge in bank stress tests | FT

The White House on Wednesday pledged “transparency” over the stress tests used to assess the health of the biggest US banks, as officials pushed wary banks and regulators to agree to disclose as much information as possible.

Robert Gibbs, US presidential spokesman, said that “early in May” there would be “transparency of determining and showing to all involved some of the results” of the tests.

Written by Colin Henderson

April 15, 2009 at 21:29

Posted in economy

Tagged with , ,

U.S. Planning to Reveal Data on Health of Top Banks

I saw somewhere earlier that the President was planning a major economic speech tomorrow, and now this below is finally coming after being delayed while some banks announced.  This probably explains the context.

U.S. Planning to Reveal Data on Health of Top Banks | NYT

WASHINGTON — The Obama administration is drawing up plans to disclose the conditions of the 19 biggest banks in the country, according to senior administration officials, as it tries to restore confidence in the financial system without unnerving investors.

Written by Colin Henderson

April 14, 2009 at 20:46

Posted in Banking Strategy, regulation

Tagged with ,

Bank Nationalisation must follow failure to meet stress test for solvency

Bank Nationalisation is finally the topic de jour.  It is an undercurrent in many discussions, and strangely has the Democrats and Republicans in some kind of opposite land debates.

I favour the view of Nouriel Roubini who speaks of the current procress as being death by a thousand cuts in this worth watching video.  The governments in UK and US are dribbling money into banks and the auto sector, with no end in sight, and little apparent contrition from management.  A strategy is needed for both those sectors and decisive action taken. However it has to be based on principle not emotion.

Martin Wolf outlines the debate here in the FT.  I would add that a clear process exists today for insolvent banks and is managed by the FDIC (US).  Each month several banks are taken over by the FDIC or arrangements made for other banks to take over – those are small local banks, but the process is clear.  However the distinction with the top banks.

It is not necessarily feasible or acceptable to have them taken over by each other.  We get into the too big to exist problem that could forsee further crises in the future.  There are 19 banks undergoing stress tests in America.  This from the FT piece.

The US Treasury’s response is its “stress-testing” exercise. All 19 banks with assets of more than $100bn are included. They are asked to estimate losses under two scenarios, the worse of which assumes, quite optimistically, that the biggest fall in gross domestic product will be a 4 per cent year-on-year decline in the second and third quarters of 2009 (see chart). Supervisors will decide whether additional capital is needed. Institutions needing more capital will issue a convertible preferred security to the Treasury in a sufficient amount and will have up to six months to raise private capital. If they fail, convertible securities will be turned into equity on an “as-needed basis”.

Martin points to this fascinating paper from Douglas J. Elliot at Brookings.  (pdf here)

I support Elliot’s views that he wraps up succinctly in his conclusion.

However, if it becomes clear through the stress test that a bank is already insolvent or is at high risk of becoming insolvent, then it would be better to go directly to the step of full nationalization. Mid-sized and smaller banks should generally be treated in a similar manner. The main difference is that the traditional approach of forcing weak banks to sell  out to stronger ones is a viable option for smaller banks, which is no longer true for the largest banks.

The issue remains solvency.  Banks cannot be insolvent.

In finance, or business solvency is the ability of an entity to pay its debts with available cash. Solvency can also be described as the ability of a corporation to meet its long-term fixed expenses and to accomplish long-term expansion and growth.

The stress tests must address solvency.  This graph indicates the variances possible in the stress tests that are possible depending on degrees of optimism or realism.  Note that write downs of this magnitude would place some banks in negative capital territory, inability to meet Basel tests, inability to raise capital, and the associated lack of confidence would result in loss of deposits exacerbating the situation.  This is the connection between capital and solvency for banks.


Roubini is infrequently wrong so I lean to his view.  I also read most political in the left, and least on the right which further supports Roubini.  We all feel the emotional raction against the point in continuing to throw good money at the biggest banks with those kind of losses in their balance sheets.  However the stress tests if done right should provide clear guidanc and objective answers.  With clear re-valuation of assets based on realistic views of the future the answers will be clear.  Note that link goes to a CIBC World Markets report which suggests US has 25 million too many cards on the road based on economic capacity.  It forecasts a reduction in auto ownership.  That type of realistic assessment of the future will determine the value of banks assets (loans and mortgages) which will ultimately determine solvency.

Written by Colin Henderson

March 4, 2009 at 03:54

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