Bank stress test results released

Generali

I've been reading and it looks like last year's farce all over again.

The stress test central case was 6% fall in GDP, fall in house prices (never happen) & rising unemployment. With Eurozone inflation at 0.3% they didn't measure the impact of deflation!

chucknorris

Generali wrote: »

fall in house prices (never happen)

I think that'll ruffle a few feathers on here.

Generali

chucknorris wrote: »

I think that'll ruffle a few feathers on here.

You think? LOL.

wotsthat

Graham_Devon wrote: »

The report seems to focus on individuals banks, but not the banking sector as a whole which, as I understand it, is very much linked? If you have bad apples in the cart, the rest can easily be effected?

I skimmed through the report and have to admit I didn't fully understand it.

None of the listed banks were said to pose a systemic risk to the system. It didn't say if there was a systemic risk to the system if two or more failed at the same time.

There's only so much you can expect to learn from economic modelling. It's still only a form of predicting the future - as scenarios become less likely so does the value of the model.

As I read it it seems as if we're now 6 or so years in and whilst things are going in the right direction there's still work to do.

Generali

wotsthat wrote: »

I skimmed through the report and have to admit I didn't fully understand it.

None of the listed banks were said to pose a systemic risk to the system. It didn't say if there was a systemic risk to the system if two or more failed at the same time.

There's only so much you can expect to learn from economic modelling. It's still only a form of predicting the future - as scenarios become less likely so does the value of the model.

As I read it it seems as if we're now 6 or so years in and whilst things are going in the right direction there's still work to do.

This is pretty good if you want a layman's explanation:

http://www.ft.com/intl/cms/s/0/63f168e2-5dee-11e4-b7a2-00144feabdc0.html

The way the ECB thinks of systemic risk is 'too big to fail'.

Deutsche Bank's failure is a systemic risk, Bca Monte Dei Paschi di Sienna (sp?) is not. What they don't appear to test for is the systemic risk caused by the failure of a lot of smaller banks, for example a series of runs on the German Sparkasse (hundreds of small, often state-owned savings banks).

wotsthat

Generali wrote: »

This is pretty good if you want a layman's explanation:

http://www.ft.com/intl/cms/s/0/63f168e2-5dee-11e4-b7a2-00144feabdc0.html

The way the ECB thinks of systemic risk is 'too big to fail'.

Deutsche Bank's failure is a systemic risk, Bca Monte Dei Paschi di Sienna (sp?) is not. What they don't appear to test for is the systemic risk caused by the failure of a lot of smaller banks, for example a series of runs on the German Sparkasse (hundreds of small, often state-owned savings banks).

Like the comment on deflation from the ECB Vice President 'it simply will not happen'. He must be the only person left who thinks there are certainties in life.

There's some pragmatism involved in stress tests. The scenarios involved don't mean that they're any more or less likely to happen in real life but there's little point being really 'tough' and ensuring 50% of banks fail and creating a self fulfilling prophesy.

Slowly but surely seems to be the order of the day. Might be the difference between slamming the stable door shut or closing it gently but firmly.

N1AK

Generali wrote: »

What they don't appear to test for is the systemic risk caused by the failure of a lot of smaller banks, for example a series of runs on the German Sparkasse (hundreds of small, often state-owned savings banks).

To be fair when they do crash safety tests they don't test for every possible type of crash but instead use a set that they believe adequately measures car safety. That doesn't mean that the test used is correct, merely that simulating every possible scenario is neither possible or beneficial.

Generali

N1AK wrote: »

To be fair when they do crash safety tests they don't test for every possible type of crash but instead use a set that they believe adequately measures car safety. That doesn't mean that the test used is correct, merely that simulating every possible scenario is neither possible or beneficial.

True but testing systemic risk without connecting interconnectedness is rather like testing each car for safety but not considering how you get the ambulances along the motorway to the scene of a pile up.

There'll never be a pile up because the motorway works and individual cars are safe for the most part.

Regulators recognise the problems of interconnectedness and have done since the 1970s and the Herstatt Bank failure at the very least.

Herstatt Bank went bust but rather unfortunately chose to go bust on a day when many FX trades were settling. Most trades 'settle' (the act of swapping assets) both sides simultaneously but cash is hard to do that with. Herstatt Bank went bust and couldn't pay on its FX trades. Other banks didn't know that however and paid out on the other side of the FX trade. Oops! The problem then is the paying banks are nursing losses that may never be resolved and will certainly take a long time (a year after Lehmans London went bust the liquidator didn't know how many FX trades were on Lehman's books or their value).

That Central Banks are trying to resolve systemic risk without looking at Herstatt risk is a little short sighted at best.

UserJong_2

these tests are always designed to be just up to the limit of where the banks would fail, they are not true tests.

https://www.youtube.com/watch?v=q-sqBwsMd34

antrobus

UserJong wrote: »

these tests are always designed to be just up to the limit of where the banks would fail, they are not true tests.

And yet 24 (or maybe 25:)) banks have failed the ECB stress tests.

UserJong wrote: »

...https://www.youtube.com/watch?v=q-sqBwsMd34

Executive summary: buy gold.