Dubious bank figures put a damper on things

| October 13, 2011 | 4 Comments

Shell game by emilykbecker


The details of the new, improved, super-duper European bank stress tests are slowly oozing out into the press–along with other information that makes us less optimistic on the health of the banking system in Europe and everywhere else.

First, the stress tests.

In the 2011 summer version banks were tested on their ability to withstand an environment of higher unemployment, lower GDP and lower house prices, plus losses on a portion of Greek, Portugese and Irish government bonds while still having Core Tier 1 capital equal to 5%. Now it seems that the magic number will change from 5% to 9% (stricter). There are also reports that the capital regime used to test the banks will change from Basel 2 rules (today’s standard) to Basel 2.5 rules (stricter) but will not go as far as Basel 3 (the strictest and thus most hated by all the banks.) Finally, the most interesting bit is the report that the EBA will test banks’ ability to take losses not only on the sick sovereign debt held in their trading books, but also on the debt held in their banking books. Banks got off easier when the banking book was excluded because the debt held there reflects the purchase price as opposed to the deeply unfavorable current market price.

So, 3 big improvements for the stress test! Can we give the whole re-test-and-recapitalize exercise 3 big cheers as well?! No? Oh. Here’s why:

The EBA giveth and the EBA taketh away
As mentioned above, the summer edition of the stress tests also looked at banks in the context of the larger economy. What happens if growth falls? What about sustained unemployment and homeowners being underwater on their mortgages? What if things, overall, get worse? Might have an impact on bank health, wouldn’t you agree? So why is it that the EBA will reportedly not look at this macro scenario this time around? It’s not just the failure to honor common sense that gets us, plus the inconsistency with their own previous behavior, but also the fact that they’re actively making the stress test less stressful!! Didn’t they learn anything from the Dexia debacle?

Doubtful data
Embarrassing, absurd and frankly, unforgivable. We have to hand it to the Matt Cameron and Ramya Jaidev of Risk Magazine who, this week respectively broke not 1 but 2 cases where the bank data provided to the EBA was just…plain…wrong.

First, French bank BPCE was shown to have overstated its derivatives risk by a minuscule €3.4 billion, which made it look like the worst bank of all 90 tested on that particular metric. But hey, they made the same mistake in their annual report so at least they’re consistent!

Then Santander, the largest Spanish bank, was reported as having no derivatives exposure to sovereigns, whatsoever. Which is, of course, completely FALSE! So why didn’t they report any? Their regulator, the Banco de España, didn’t hand it over to the EBA because they decided that it was “not material”! But don’t you worry your pretty little head about it because Santander, when pushed, said it was only somewhere in the range of €70 million to €250 million. It’s between x and over 3 times x. We don’t know, they say. You figure it out, ’cause we’ve got stuff to do.

Talk about a confidence-building exercise.

A general unease
To put it bluntly, we really don’t know what in heaven’s name is going on with these banks. It seems they’re not really into what the EBA describe when announcing the results of the summer stress test,

“provid[ing] an unprecedented level of transparency on banks’ exposures and capital composition to allow investors, analysts and other market participants to develop an informed view”.

Like a mischievous schoolboy squirming under the harsh stare of the principal, it’s seems they’re all thinking about how to get themselves out of a jam. Even if that means resorting to blatant fudges. Have a look at this revealing video by John Authers and Luke Templeman of the FT, which describes the various accounting wriggles of major banks attempting to paper over probable losses on Greek debt. The inconsistency reeks of desperation. Indeed, how do the auditors let them get away with it?

Has it always been thus? 
We ask this question sincerely. Have we ever been able to trust banks on their numbers? Strangely enough, an obscure mathematical formula may hold the answer to this question. Jialang Wang takes a fascinating look at the concept known as Benford’s Law to give us the answer. In short, maybe it hasn’t always been this way–but it has been since about 1981.




Tags: , , , , ,

Category: Banking