EURUSD gapped higher at the open as the euro responded positively to the ECB’s stress tests. The official report confirmed the data that was leaked on Friday, with 25 banks across the eurozone failing the test with a total shortfall of EUR24.6bn. This is based on banks’ end-2013 balance sheets and many of these banks have recapitalised since then. Post-recapitalisations there’s only around 10bn in shortfall across 13 banks, which isn’t overly concerning.
None of Europe’s largest banks failed the test, nor did any banks in France or Spain (there was one technical failure in Germany). Italian and Greek banks fared the worst in the test, with 9 banks in Italy and 3 banks in Greece failing the test. There were also 3 banks in Cyprus that failed the tests.
Overall, the results are slightly encouraging but are by no means game changing. The relatively small number of failures may cause the market to once again question the effectiveness of these tests. The ECB in our view should restucture such test, in order to avoid bank failures, for the history not to repeat itself, and in order to raise the necessary red flags early on, or we will continue to see big to fail banks, that are paid by taxpayer's money to prevent them from liquidation because simply they are oo big to fail. More importantly, the review does almost nothing to assess the ability of these banks to increase lending in the region, without which growth is going to remain in the doldrums.
Despite that Switzerland has settled down of the mortgage-back securities and bank liquidity problem that sparked the crisis in the first place, plenty of potential pitfalls remain as countries scramble to repair their battered finances.
The most pressing of these is a fear that some European countries, most notably Greece, could default on government debts. Nervous glances have also been cast at some eastern European emerging economies that were popular investment markets before the crash and have suffered more than most countries during the global recession.
The financial crisis, culminating in the collapse of US bank Lehman Brothers in 2008, sparked a rush by many countries to impose greater restrictions on banking operations in an effort to avoid a repeat scenario.
Proposed tightening of regulations have centered on increasing the size of assets banks must keep in reserve to buffer against losses, improving the quality of those assets and restricting the amount of debt (leverage) banks use to conduct their business.
Other aspects to come under the regulatory microscope have been restricting bonuses and the counter-party exposure banks have to the potential liabilities of rivals.
In this respect, Switzerland has been ahead of the curve, already demanding tougher conditions for its two main banks, UBS and Credit Suisse, back in 2008.
“Swiss banks are quite resilient and have been traded as safe havens in the last few months,” Bank Sarasin analyst Daniel Bischof told swissinfo.ch. “They have low exposure to southern European countries [such as Greece], above average liquidity and high capital ratios.”
Despite that Switzerland has settled down of the mortgage-back securities and bank liquidity problem that sparked the crisis in the first place, plenty of potential pitfalls remain as countries scramble to repair their battered finances.
The most pressing of these is a fear that some European countries, most notably Greece, could default on government debts. Nervous glances have also been cast at some eastern European emerging economies that were popular investment markets before the crash and have suffered more than most countries during the global recession.
The financial crisis, culminating in the collapse of US bank Lehman Brothers in 2008, sparked a rush by many countries to impose greater restrictions on banking operations in an effort to avoid a repeat scenario.
Proposed tightening of regulations have centered on increasing the size of assets banks must keep in reserve to buffer against losses, improving the quality of those assets and restricting the amount of debt (leverage) banks use to conduct their business.
Other aspects to come under the regulatory microscope have been restricting bonuses and the counter-party exposure banks have to the potential liabilities of rivals.
In this respect, Switzerland has been ahead of the curve, already demanding tougher conditions for its two main banks, UBS and Credit Suisse, back in 2008.
“Swiss banks are quite resilient and have been traded as safe havens in the last few months,” Bank Sarasin analyst Daniel Bischof told swissinfo.ch. “They have low exposure to southern European countries [such as Greece], above average liquidity and high capital ratios.”
EURUSD
EURUSD jumped to a resistance zone around 1.2700 at the open, before drifting back towards Friday’s close. This isn’t surprising given that the market had time to prepare after the information that was leaked on Friday. Also, USD strength, perpetrated by a push higher in USDJPY, may be flowing in EURUSD. From here, we may have to wait until European markets open to assess the long-term impact these tests will have on the euro. A slight positive reaction from banking stocks this evening may bolster the common currency.
Mohamed Shahin
Mohamed Shahin
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