The results are in. 

Only seven of 91 banks stress tested need to raise new capital to weather a potential economic downturn or sovereign debt crisis.  One from Greece and Germany, the other five were small Spanish regional banks.  The combined funding shortfall of the seven banks is roughly €3.5 billion.  Analysts were estimated shortfalls between €30 billion to €90 billion.

The tests weren’t exactly rigorous, especially in the terms of the assumed downside for GDP growth and the haircuts on sovereign debt holdings.  Heck, the tests entirely omitted the possibility of a sovereign default.   Even more, the tests only focused on the impact to banks’ short-term trading books rather than their entire balance sheets. 

I’m a little disappointed that details on individual bank tests were not immediately available, but I suspect they will be released in time.  Details that are of importance include how much government debt each bank is holding from troubled European countries.

Officials announced that the European stability fund can be used to recapitalize banks if the recovery falters.  This is a necessary backstop for easing the stresses in the credit markets.  No word on how much taxpayer funds will be used to support the banks.

The big thing to remember is that the stress tests are not a cure-all for the problems in Europe.  Fiscal tightening will still weigh on economic growth prospects for a long time.

Peter Lazaroff, Investment Analyst

www.acrinv.com