Archive for July 23rd, 2011

There’s a rich tradition of comedy in this country of ours and in many ways it’s what makes the quality of life what it is. Whether it’s a rowdy mob on the pavement outside an auction at the Shelbourne Hotel, acting like a bunch of balubas, threatening to sue the Man if they weren’t allowed into the auction to bid on a flat in Portlaoise, just as the IMF chief for Ireland happens to walk past en route to Government buildings to help sort out the aftermath of our property/banking collapse. Or there’s the amazing feat of having transformed our economy from one which in 2007 had a 25% debt:GDP with €25bn in the sovereign wealth fund (NPRF) to now face a 120% debt:GDP and our piggy bank depleted. And don’t even start me on cheese as an instrument to combat financial hardship. We really are a funny nation.

So it was probably appropriate that it was an Irish woman, Jill Forde that introduced the European Banking Authority stress test announcements last Friday week (the video is here), and the panel of three speakers included one of our own as well, John Fell from the ECB. It was a first class comedic performance as the latest stress test results were published by the reincarnation of the CEBS that produced last years widely discredited results – remember those were the tests that awarded blue rosettes to AIB and Bank of Ireland which a few months later needed €18bn of additional capital to remain open. There was a healthy dose of cynicism in 2010. This year there was cynicism fatigue as we were told that eight banks didn’t pass the stress tests and would need a total of €2.5bn of new capital so as to be properly capitalised in the eyes of the EBA. One of the banks to fail was CAM savings bank (Caja de Ahorros de Mediterraneo), a small Spanish regional bank which the stress tests concluded would need €947m of new capital to bring it from its 3% present capital reserve to a 5% capital reserve. Fair enough, at least the EBA did recognize that new capital would be required so that the bank would meet the EBA’s minimum standards.

And less than one week later, lo and behold, yesterday, Spain had to bail the bank out with €2.8bn of capital plus an additional immediate line of credit of €3bn. And for good measure the board of directors was fired. (El Mundo reports the story in Spanish, the Irish Independent has a summary). Okay the comedy timing wasn’t perfect, if the intervention by the Spanish central bank had taken place a week earlier, it would have been poetically timed to coincide with the EBA’s stress test announcements, but seven days later is still pretty good. Not only has this one bank needed more capital than the entire European banking system (or at least the 90 banks that comprised the stress test population) but additionally, €3bn was provided in liquidity funding by Spain’s central bank, rather than the ECB; and as we know in Ireland’s case, the collateral requirements at the national central bank are lower than the ECB’s – a letter of comfort from the Government is good enough here for the Central Bank of Ireland to lend money to domestic banks.

A general view had emerged prior to the publication of the stress tests last week that 15 banks would fail needing €30bn of additional capital. The results weren’t even greeted with cynicism, such was the low level of expectation. For one bank to need such a large intervention just seven days later would have been even more hilarious if the results had been taken seriously, but other than mining the results for some useful financial information, it seems the EBA tests were ignored. I wonder if these clowns will be back next year.

UPDATE: 10th October, 2011. I’m surprised that it has taken three months for the second stress-tested bank to succumb to begging for state assistance, but today French/Belgian/Luxembourgish bank Dexia announced that it to receive €4bn from the Belgian government as well as a €90bn state guarantee from France, Belgium and Luxembourg. Somehow I don’t think it will be another three months before we get another bank bailout…

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