When it comes to stress tests, especially for European banks, the one thing history suggests is the tests will be essentially stress-free, by design. Why should this time be any different?
Nonetheless, European Central Bank President, Mario Draghi Says ECB Won’t Hesitate to Fail Banks in Stress Tests.
For those of you who do not speak Draghize I offer these translations.
Draghize: “Banks do need to fail to prove the credibility of the exercise”.
Mish: We are carefully scrutinizing several non-critical banks, looking for a couple of scapegoats, hoping to fool the public regarding the credibility of the exercise.
Draghize: “If they do have to fail, they have to fail. There’s no question about that.”
Mish: If any big banks are in trouble. They won’t fail. There’s no question about that.
Draghize: “The test is credible because the ultimate purpose of it is to restore or strengthen private sector confidence in the soundness of the banks, in the quality of their balance sheets”
Mish: The test is credible because we say it is.
ECB Executive Board member Joerg Asmussen: “This is our third and last chance to restore confidence after two previous stress tests by the EBA failed to do so.”
Mish: We are praying this stress test does not blow sky high as fast as the last two did.
Draghize: “The region’s governments will be ready to fill any capital holes that emerge as a result of the stress tests.”
Mish: The region’s governments are totally unprepared to fill any capital holes that emerge as a result of the stress tests.
Draghize: “I have no doubt whatsoever that backstops will be there – – which doesn’t mean that they will have to be used because first and foremost it’s private money that needs to be used. There’s an explicit commitment to have in place proper, adequate national backstops by the time the exercise is being carried out.”
Mish: Bondholders will not suffer as a result of any capital shortages in our hand-picked failures. If anyone needs to suffer, it will, as usual, be taxpayers.
Draghize: “A substantial amount of private capital has been raised so we’re not starting from scratch but certainly, it’s the beginning of a new way of doing things.”
Mish: We are starting from scratch. Private capital is inadequate. This is of course why the tests must essentially be stress-free.
To help explain why there will not be any capital shortfalls, please see New Rules for Italy Banks “I’ll Guarantee Your Derivatives If You Guarantee Mine”