CEBS released its European bank stress test results. The main reaction: “Really?”
The highly anticipated and quite positive results of the European bank stress tests have left many a market observer dubious at best. But in whatever way the results are interpreted, for US MNC treasurers the best strategy for now would be to “stay the course” when it comes to dealing with their relationship banks in Europe.
In its release, the Committee of European Banking Supervisors (CEBS) reported that only seven European banks failed of the 91 tested. All but one German bank passed (even the Landesbanken passed, surprising many). All four French banks, all four Portuguese banks, and all five Italian banks passed. Five Spanish cajas, or savings and loans, failed, while all of its commercial banks passed. Also somewhat surprising, one Greek bank failed. The results pretty much confirmed earlier leaks.
Reaction has been skeptical: the main thrust being that not knowing the metrics of the tests, it’s hard to determine how stressful they were. “The assumptions [of ‘sovereign shock’ scenarios] strike us as incredibly low and suggest that the stress tests really weren’t that stressful,” wrote Win Thin, a senior currency strategist at Brown Brothers Harriman, in a note to clients.
Maintain heading
Still, some treasurers took the news at face value, although guardedly so. Said one treasurer at a US MNC: “The results look better than expected at this point. But I’ll reserve judgment until [later] when the bank-by-bank results are published.”
This treasurer went on to say that as long as treasurers have cash deposits at European banks that are too big to fail, “then I would not make any changes to my cash pool in Europe.” And as far as interest-rate, FX and commodity hedging were concerned, as long as ISDAs and CSAs (to collect margin) are in place, “I am comfortable using the European banks that are too big to fail.” However, he recommends some limitation on the maximum exposure with any given bank.
But for those companies who have business with a bank that is small enough to fail or with one that failed the stress test, it would be a good idea to review any ISDAs and CSAs, and at the same time, perhaps work on a strategy to sever or reduce the relationship.