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The European Bank Stress Tests

  • 26-07-2010 1:33pm
    #1
    noodler
    Registered Users, Registered Users 2 Posts: 26,726 ✭✭✭✭


    Quick query regarding capital ratios:

    Am I correct in saying the 6% required to pass the CEBS could be made up of almost anything whereas the 4% required (after a shock) under our domestic PCAR had to be mostly equity and retained earnings?


Comments

  • #2
    [Deleted User]
    Posts: 5,589 ✭✭✭ [Deleted User]


    I'm guessing the first requirement is the Tier 1 core capital as set out by the Basle rules.


  • #3
    noodler
    Registered Users, Registered Users 2 Posts: 26,726 ✭✭✭✭noodler


    According to Wolfgang Manchau the 6% could be anything.


  • #4
    [Deleted User]
    Posts: 5,589 ✭✭✭ [Deleted User]


    Hybrid capital instruments are normally excluded from tier 1 capital.
    The test done in Ireland by the Financial Regulator specifically excluded as per 'normal' guidelines.
    If they were being used, and I would not take an FT report as gospel given the level of errors that the media have been reporting over these, then that is very odd.


  • #5
    noodler
    Registered Users, Registered Users 2 Posts: 26,726 ✭✭✭✭noodler


    I won't take the hybrid instruments as gospel itself (although I don't really understand what they are other than simply a loan from a Gov that doesn't warrant a shareholding) but the 6% has been said as simply core tier 1.

    But the FR, whenever he or anyone gets a chance to mention that the PCAR had 8% (although before the adverse scenario) the fact 7% of it has to be equity is always mentioned.

    Really, its a problem for Europe more than us for once though if it is the case.


  • #6
    [Deleted User]
    Posts: 5,589 ✭✭✭ [Deleted User]


    PCAR was done to kick the Irish banks into shape. Simply put, we can't afford to be as lax as some other jurisdictions can. PCAR required a 7% equity rate as then liquidity was guaranteed. The remaining 1% was comprised of assets which were effectively liquid.

    Hybrids can be anything really, convertible bonds would be an example - as you can see that is not very liquid and there are strict rules under Basle about inclusion/exclusion with the marjority being stuck in Tier 2.


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  • #7
    noodler
    Registered Users, Registered Users 2 Posts: 26,726 ✭✭✭✭noodler


    I wouldn't say lax but I don't know what the internal regulatory examinations in other euro countries or PIIGS were but I certainly hope they were more stringent than the CEBS.

    Pouring over the results today and hard to disagree with Lenihan's previous comments that the PCAR was far, far more stringent.


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