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July 28, 2010
Stress Testing - Measuring Systemic Risk across the globe
Last year EU was exploring a Systemic Risk Council to manage risks better across the EU. A small but significant step towards a consolidated EU Systemic Risk management is the recent round of Stress Tests in EU .
As we know, the US banks underwent a similar round of Stress testing exercise early in 2009. 10 out of 19 big US banks were required to raise a combined $75billion in capital after the stress testing results.
On Friday, CEBS released the stress tests results that subject each banks Tier 1 capital projections until end 2011 to worst case scenarios.
The tests were conducted on 91 banks across 20 countries. Only 7 out of 91 banks in EU failed the tests. EU banks need a total of 3.5 billion euros ($4.5 billion) to boost their capital reserves, much lower than expected. Given the diverse nature of EU states, there were different measures in different countries around some of the assumptions for the shock scenarios around recession, unemployment rates, property values, during economic and financial storm.
A total of 7 banks failed the tests - 5 small Spanish banks, Germany's state-rescued Hypo Real Estate and Greece's Atebank. There are 17 banks that met the borderline 6-6.9 % Tier 1 capital in the worst case scenario. There were 15 banks each on 7%-7.9% and 8%-8.9% range. There were 13 banks in 9% - 9.9% ratios, and 24 banks with 10% or higher Tier 1 capital ratios.
Spain, of course led the drive for transparency, and conducted much wider tests of its banking system and more disclosures. Other major economies are exploring stress testing too as a confidence boosting as well as systemic risk measures, for e.g. Chinese regulators are expected to conduct industry wide stress testing. Investors and analysts can also run their own risk simulations based on the detailed breakdown of the banks exposure to the sovereign debt of EU and other countries.
It will be interesting to see how soon other countries conduct their own industry wide stress testing to reassure the markets.
Posted by spachava at July 28, 2010 11:02 PM
