Geneva: The European Union's "tough" and "transparent" stress tests disappointed because a sovereign risk shock was only applied to bonds that banks trade rather than those they hold to maturity, Société Générale SA said.
"The one disappointment was that the sovereign stress test was only applied to the banks' trading books," Société Générale economists Michala Marcussen and Klaus Baader wrote in a note to investors yesterday. "Overall we find the tests to be both consistent and transparent."
Germany's Hypo Real Estate Holding AG, Agricultural Bank of Greece and five Spanish savings banks didn't have adequate reserves to maintain a Tier 1 capital ratio of at least 6 per cent in the event of a recession and sovereign-debt crisis, lenders and regulators said July 23. Those seven banks need to raise a combined 3.5 billion euros (Dh12.8 billion) of capital, compared with Société Générale's projection of 30 billion euros.
Estimation
Before the results of the tests on 91 banks were published, analysts at Nomura Holdings Incorporated estimated the banks would have to raise 30 billion euros. Goldman Sachs Group Incorporated predicted they would need 38 billion euros and Barclays Capital said they would require as much as 85 billion euros. Tests carried out in the US last year found that 10 lenders, including Bank of America Corporation and Citigroup Incorporated, needed $74.6 billion (Dh273.9 billion).
"Several headwinds loom", including the 197 billion euros of government support in the banking industry, the Société Générale economists said.
There is also uncertainty about the types of capital needed under new Basel III regulations and the challenge of taming public finances, they wrote.
- 10: US lenders need $74.6b in capital
- 7: European lenders need 3.5b euros
- 91: banks were included in the stress tests
