A silver lining to the banking stress tests?

19th Jul 2011 17:27

The stress tests conducted by European regulators were released on Friday evening and were greeted with much wailing and gnashing of teeth by analysts and commentators.Perhaps this was because they wanted to go home and have a peaceful weekend and this report was a serious inconvenience.The reason they actually gave for their frustration was simple: the stress tests had glaringly ommitted to look at what would happen to banks if there was a Greek sovereign debt default.Given how likely this scenario is, it does seem this was an extraordinary thing to ignore.The reaction was predictable as bank shares plummeted on Monday. In the UK Lloyds Banking Group, Barclays, and Royal Bank of Scotland led the FTSE100 down, off 7.5%, 7%, and 6% respectively. There was a bounce on Tuesday, but that had a certain whiff of the 'dead cat' about it.What the tests did do was lay bare the extent to which banks are exposed to the sovereign debt of the peripheral economies (Greece, Italy, Ireland, Spain and Portugal).For example, analysts got confirmation of what had been long suspected; Italian and Spanish banks are highly exposed to their own governments' debt.Yields on Italian and Spanish 10-year bonds duly went up to record highs of over 6%.But now the dust has settled some brave souls have found a silver lining to the thunder cloud that the stress tests made break over the markets on Monday.One is Patrick Jenkins, banking editor of the FT.He says that privately, European regulators aren't overly concerned about the criticism heaped upon them.The key argument here is "having forced banks to publish details of their holdings on soveriegn bonds and credit exposures, country by country,it didn't matter that political contraints stopped them from modelling for a Greek default, if that modelling could be done independently by professional experts who the market was more likely to listen to in any case".Why bother doing it if they aren't going to believe you and are going to do it themselves anyway?Are EU regulators capable of such Machiavellian cunning? Who knows?Jenkins goes on to make one more key point: in the current environment would more micro analysis of Greek default scenarios make a difference? What is moving the market at the moment is uncertainty, fear and good old fashioned opportunism. This is being driven by weighty - and decidedly scary - macro events; 'top down analysis' as Jenkins puts it. This trumps everything in the short term. At least the good folk of the City now have some numbers to crunch courtesy of the stress tests and can be prepared when calm and well-argued decision making is once again the order of the day.