28 October 2014

Banks Fail European Stress Tests

The European Central Bank recently released the results from stress tests conducted on approximately 130 banks in the EuroZone region. According to an article in Business Insider, 25 banks failed the health test and had a total shortfall of 25 billion Euro.

The story reports that the analysis went through December 31, 2013 and since then 12 of the 25 banks have fulfilled their capital shortfall. As a result, 13 are required to raise more capital.

According to the article, Italy faired the worst with 9 banks that failed the “adverse scenario”. As one would expect Cyprus, Greece, Portugal and Italy had proportionally the highest shortfall. Surprisingly, according to a Bloomberg article no Spanish or French institutions were required to find more capital.

The purpose of the tests was to simulate a recessionary environment to determine the health of the banking system during a time of stress. What is interesting about the tests is that they did not appear to be too strict.

Tests Were Lenient

In an article in Bloomberg, Hans-Werner Sinn, president of Munich-based Ifo Institute said that The simulated scenario was too lenient because it didn’t incorporate deflation in southern Europe.

Mr. Sinn’s conclusion, according to an article in ZeroHedge, was that the AQR/stress test implied inflation for all of euro zone to prevent too many banks from failing test. It is interesting with much of Europe experiencing deflation that the methodology used for the tests was inflation? 

As a comprehensive analysis, the testing should have incorporated both inflation and deflation to see how banks would fair under each environment. 

While it is pure speculation on our part, should deflation emerge as the major issue for the central banks to deal with over the next year than the results of the stress tests will look much different than what the actual outcome will be.

Assessing the Health of Banks is Still a Guessing Game

According to the Bloomberg articleanother interesting result from the test was that none of Europe’s largest financial institutions were found lacking in capital? So the result of all these tests is that the average person still has no idea how to evaluate the safety of banks.

The banking system will likely not fair well whether inflation or deflation becomes the persistent problem for Europe. This is one of the reasons why physical Gold becomes the best asset to have as part of an investment portfolio.

Author: celticgold.eu

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