Aug 062016
 
 August 6, 2016  Posted by at 9:00 am Finance Tagged with: , , , , , , , , , , ,  Comments Off on Debt Rattle August 6 2016


Ben Shahn Sideshow, county fair, central Ohio 1938

UK’s Four Biggest Banks £155 Billion Short Of Safety (Ind.)
Want To Avoid Recession? Then Shower UK Households With Cash (G.)
A Realistic Look at July’s Nonfarm Payrolls (M2)
The Politically Incorrect Jobs Numbers Everyone is Hushing Up (WS)
Hacked Bitcoin Firm Plans To Spread Losses Across All Users (CNBC)
In China, When in Debt, Dig Deeper (WSJ)
Only In China: Companies Become Banks To ‘Solve’ Financial Difficulties
Galbraith Says Critics Have It All Wrong Over Greece ‘Plan X’ (Kath.)
Stiglitz Quits Panama Papers Probe, Cites Lack Of Transparency (R.)
Is Hillary Clinton Corrupt? An Archive of Financial Improprieties (Medium)
Average American 15 Pounds Heavier Than 20 Years Ago (HDN)

 

 

“That sum is not far away from the present market capitalisation of these banks, implying that they are massively overexposed.”

UK’s Four Biggest Banks £155 Billion Short Of Safety (Ind.)

The UK’s four biggest banks would need to raise another £155bn in fresh capital to withstand a new financial crisis, despite the view of the Bank of England Governor that lenders have an adequate cushion to cope with further turmoil. Those are the results of research from three respected financial academics – and add to a growing feeling that the Bank of England is dangerously undercooking its capital requirements on UK lenders in the face of swelling instability in financial markets. UK banks had to be rescued in 2008 and 2009 at massive cost to British taxpayers. Capital represents the shareholder funds in banks available to absorb losses. When losses are greater than the capital cushion the bank is bust and may need to tap state support if deemed to be systemically important by politicians and regulators.

In a new paper Viral Acharya of New York University, Diane Pierret of the University of Lausanne and Sascha Steffen of the University of Mannheim calculate that HSBC, Barclays, Lloyds and the Royal Bank of Scotland would need to raise $185bn (£155bn) of new equity between them to retain a 5.5% capital cushion in a crisis, which is the benchmark of safety used in the past by the European Banking Authority. That sum is not far away from the present market capitalisation of these banks, implying that they are massively overexposed. The EBA’s stress test exercise last Friday showed the UK’s major lenders would see their capital diminished in another European economic crisis, but not below the 5.5% level of so-called “risk-weighted assets” that would have created pressure for more equity injections.

[..] Acharya, Pierret and Steffen argue that the broader European banking sector could be undercapitalised to the tune of around €890bn – a figure they calculated using stock market valuations of banks’ equity rather than the sums reported by lenders themselves. Bank share prices have continued to fall since last Friday’s EBA stress test, implying investors are far from reassured by the fact that most lenders received a clean bill of health from the regulators.

Read more …

Would it even help anymore?

Want To Avoid Recession? Then Shower UK Households With Cash (G.)

Just give people the money. Give them cash, dole it out, increase benefits, slash VAT, hand it to those most likely to spend it: the poor. Put £1,000 into every debit account. Whatever you do, don’t give it to banks. They will just hoard it or use it to boost house prices. Britain is suffering from a classic liquidity trap. There is insufficient demand. Yet all the Bank of England did on Thursday was wring its hands, blame Brexit and go on digging the same old holes. They are labelled lower interest rates, quantitative easing and more cash for banks. Those policies have been in place for some seven years. They have failed, failed, failed. Not one commentator yesterday thought cutting interest rates to 0.25% would make any difference to the threat of recession.

Worse, by cutting annuity yields it would impoverish many old people who would otherwise spend. The Bank’s cumbersome monetary bureaucracy was set up to keep inflation under control by curbing bank lending. That failed during the credit crunch. Now it is failing in the opposite direction. Channelling policy through the banks has proved useless in protecting the economy from deflation and recession. The Bank is trapped intellectually in the world in which it lives, that of the City and the banking system. Like chateau generals at the Somme, it never ventures to the economy’s frontline, where buyers meet sellers and generate growth. It thinks of bonds, investments and the only glamour spending it recognises, on infrastructure. It believes that an economy can be regenerated through middle-class home ownership and state mega-projects.

But there is no shortage of funds to invest. Companies, like banks, are awash in cash. The problem is that savers are not spending; if they spend on anything it is on property, and that, too, may now slide. It is irresponsible to await the chancellor’s autumn statement and a political fiddle with tax rates. The engine of the economy must crash into forward gear. Money must be got into bank accounts, cash cards, shops tills and revenues. The plea from 35 economists published in the Guardian this week for “unconventional measures” made only one mistake. It suggested more spending on state infrastructure, which is just spending delayed. Where the economists were right was in suggesting “an immediate increase in household disposable incomes”.

Read more …

“..the U-6 unemployment number is 10.7% of the nation’s workforce..”

A Realistic Look at July’s Nonfarm Payrolls (M2)

The Bureau of Labor Statistics (BLS) released its nonfarm payroll data this morning, showing that 255,000 jobs were created in July. The unemployment rate remained at 4.9%. May data was revised up from the eyebrow-raising low number of 11,000 jobs to 24,000 jobs while June was also revised upward from 287,000 jobs to 292,000. That brought the monthly average to 190,000 jobs over the past three months. Unfortunately, drilling down into the more granular details, a far less rosy picture emerges; a picture which is far more consistent with an economy feeling the continued weight of unprecedented wealth and income inequality; a picture that is far more correlated to an economy where “58% of all new income since the Wall Street crash has gone to the top 1%,” to quote Senator Bernie Sanders.

The data for July shows that the U-6 unemployment number is 10.7% of the nation’s workforce, more than double the official number of 4.9%. The U-6 unemployment rate includes the number of people unemployed; plus individuals just marginally attached to the labor force; plus those employed part-time for economic reasons. (The Bureau of Labor Statistics provides the following definition of marginally attached: “Persons marginally attached to the labor force are those who currently are neither working nor looking for work but indicate that they want and are available for a job and have looked for work sometime in the past 12 months. Discouraged workers, a subset of the marginally attached, have given a job-market related reason for not currently looking for work.)

But a far bigger problem with the BLS data is what constitutes an “employed” worker to our Federal government’s numbers crunchers. According to the Bureau of Labor Statistics, you could be an out of work MBA graduate but if you help your brother in his deli for 15 hours in a week while living in his home, you’re counted as employed. (The BLS says that a worker who makes no money at all donating his or her services to a family business for 15 hours or more per week is considered employed.)

Read more …

The US keeps addding more people than jobs.

The Politically Incorrect Jobs Numbers Everyone is Hushing Up (WS)

On its population clock, the Census Bureau estimates that the US population on August 5, 2016, at 4:49 p.m. ET (yup, down to the minute) was 324.17 million. That’s up from 308.76 million in April 2010. Since the darkest days of the Great Recession, the US population has grown by 15.4 million. The Census Bureau also estimates that there are currently 8.6 births per minute, minus 4.6 deaths per minute, plus 2 arriving immigrants (“net”) per minute, for a gain of nearly 6 folks per minute. Everyone ages, so the young ones move into the labor force, but the baby boomers are fit and healthy and don’t feel like retiring, and so they hang on to their jobs for as long as they can, despite the rampant age discrimination they face in many sectors, particularly in tech, though obviously not in politics.

In 2010, 24% of the people were under 18. That was 74 million people. Millions of them have since moved into the labor force, elbowing each other while scrambling for jobs, as have those millions who were then between 18 and their twenties and in college or grad school. These millennials have arrived on the job market in very large numbers. In April 2010, there were 130.1 million nonfarm payrolls. In today’s July report, there were 144.4 million. Hence, 14.3 million jobs have been added to the economy over the time span, even as the total population has grown by 15.4 million. So that’s not working out very well. On average, 205,300 jobs need to be created every month just to keep up with population growth and not allow the unemployment situation to get worse.

Read more …

Maybe they should be forced to pay back all their clients and close?

Hacked Bitcoin Firm Plans To Spread Losses Across All Users (CNBC)

The bitcoin exchange Bitfinex has said it is considering sharing losses among all its users after around $70 million worth of bitcoin was stolen earlier in the week. “We are still working out the details so nothing is set in stone, however we are leaning towards a socialized loss scenario among bitcoin balances and active loans to (bitcoin/dollar) positions,” the Hong-Kong based company said on its website on Friday. Bitfinex revealed it had been hacked on Tuesday and suspended trading, causing prices of the digital currency to fall significantly. A total of 119,756 bitcoins, worth $68 million at current prices, were reportedly stolen as a result of a security breach.

The company added in its latest statement that nothing had yet been decided and it was still settling positions and account balances. Bitfinex’s “socialized loss scenario” most likely means it will distribute its losses among all of the platform’s users, according to Charles Hayter, chief executive and founder of digital currency comparison website CryptoCompare. This would mean users whose bitcoins were never originally stolen would be affected. “In essence, (this is) a haircut for all users on their deposits. To what degree depends on the devil in the details and what the total capital held by BitFinex is,” Hayter told CNBC via email.

Read more …

A heavily indebted company gets permission to open a bank, to rival another bank that has 25% of its loans off-balance-sheet and non-performing. What could go wrong?

In China, When in Debt, Dig Deeper (WSJ)

When the going gets tough in China, just get a bank. With profits headed south, heavily indebted Chinese heavy-machinery giant Sany Heavy Industries said this week it won approval to set up a bank in the Hunan province city of Changsha. With 3 billion yuan ($450 million) of registered capital, it will be a relatively large institution as Chinese city-based banks go. Sanyplans to join forces with a pharmaceutical company and an aluminum company.

In recent months several city commercial banks in China have been taken over by the likes of tobacco and travel companies, recapitalized and renamed. Banking licenses are scarce in China, and rarely are new banks set up from scratch. Sany’s Sanxiang Bank will be up and running in six months. It will go up against crosstown rival Bank of Changsha, which at the end of last year had substantial 90 billion yuan book of off-balance-sheet loans, more than a quarter of them nonperforming. Sany had better ramp up quickly.

Read more …

Comment on the WSJ piece above.

Only In China: Companies Become Banks To ‘Solve’ Financial Difficulties

China is desperate to solve several problems it has due to its debt to GDP ratio being north of 300%. It may have found a pretty unconventional one by letting companies become banks, according to a report by the Wall Street Journal. “With profits headed south, heavily indebted Chinese heavy-machinery giant Sany Heavy Industries said this week it won approval to set up a bank in the Hunan Province city of Changsha. With 3 billion yuan ($450 million) of registered capital, it will be a relatively large institution as Chinese city-based banks go. Sany plans to join forces with a pharmaceutical company and an aluminum company. Sany already operates an insurance and finance division with the goal of internal financing and insurance services for clients.”

One problem is that companies are defaulting on bond payments and there is no adequate resolution mechanism for bad debts, at least according to Goldman Sachs. “A clearer debt resolution process (for example, how debt restructuring on public bonds can be achieved, how valuation and recovery on defaulted bonds are arrived at, the timely disclosure of information and clarity on court-sanctioned processes) would help to pave the way for more defaults, which in our view are needed if policymakers are to deliver on structural reforms,” the investment bank writes in a note. By becoming or owning banks, the companies can just shift debt around different balance sheets to avoid a default, although this is probably not the resolution that Goldman Sachs had in mind when talking about structural reforms.

Another problem is that the regime has more and more difficulties pushing more debt into the economy to grease the wheels and keep GDP growth from collapsing entirely. China needs 11.9 units of new debt to create one unit of GDP growth. At the same time, the velocity of money or the measure of how often one unit of money changes hands during a year has fallen to below 0.5, another measure of how saturated the economy is with uneconomical credit. If the velocity of money goes down, the economy needs a higher stock of money to keep the same level of activity.

Read more …

Kathimerini is going off the rails, as are a group of Greeks. Accusing Varoufakis and Galbraith of planning a military coup is so far beyond the pale, it’s reason to look at legal action.

Galbraith Says Critics Have It All Wrong Over Greece ‘Plan X’ (Kath.)

University of Texas professor James Galbraith, a close associate of Yanis Varoufakis, has urged the 23 US-educated Greeks who recently criticized him for his part in last year’s negotiations with Greece’s creditors to read his book. Galbraith’s response came in the form of a letter to Kathimerini, which had published a story on July 29 on the letter from the 23 academics, addressed to the president of the University of Texas. In his own letter, Galbraith mentions the fact that his critics say they learned of his work as head of the team that worked on the so-called “Plan X” from interviews in the Greek press and excerpts of the Greek translation of his book, “Welcome to the Poisoned Chalice” (Yale University Press).

He asks why, given their knowledge of English, they did not read the original: “Had they done so, they would have found that the allegations they made are factually false.” Galbraith characterizes Plan X as “preliminary,” admitting that “the work of a small team cannot fully prepare for such a dramatic event.” He repeats that it would only have been activated if the Europeans had carried out their threat to cut off emergency liquidity via the ECB to Greek banks. “This would have triggered a forced exit of Greece from the euro, against the will of the government,” he notes. “The threat had been delivered by the president of the Eurogroup, Jeroen Dijsselbloem, in late January,” he adds, mentioning also the suggestion by German Finance Minister Wolfgang Schaeuble that Greece take a “holiday from the euro.”

Galbraith further rejects the claim made by the 23 that his plan constituted a “monetary-cum-military coup d’etat” and that it would involve “mobilizing the Greek armed forces to suppress possible civil disorder.” “We did not suggest using the military inappropriately or outside the Constitution. The only use of the word ‘mobilization’ in my book refers to the civil service.” He also denies that the plan included a plot to arrest the governor of the central bank. The memo on Plan X, as Galbraith repeats in his letter, “was prepared at the request of the prime minister” and “at no time was the working group engaged in advocating exit or any policy choice. The job was strictly to study the operational issues that would arise if Greece were forced to issue scrip or if it were forced out of the euro.”

Finally, Galbraith responds to claims in the letter from the 23 that he regretted the non-activation of Plan X. “This claim also is false,” he writes, making reference to his interview with Kathimerini on July 6, 2016, in which he had stated that “we were preparing for a scenario that everyone hoped to avoid.”

Read more …

“..even as an expert on economic and organized crime, I was amazed to see so much of what we talk about in theory was confirmed in practice..”

Stiglitz Quits Panama Papers Probe, Cites Lack Of Transparency (R.)

The committee set up to investigate lack of transparency in Panama’s financial system itself lacks transparency, Nobel Prize-winning economist Joseph Stiglitz told Reuters on Friday after resigning from the “Panama Papers” commission. The leak in April of more than 11.5 million documents from the Panamanian law firm Mossack Fonseca, dubbed the “Panama Papers,” detailed financial information from offshore accounts and potential tax evasion by the rich and powerful. Stiglitz and Swiss anti-corruption expert Mark Pieth joined a seven-member commission tasked with probing Panama’s notoriously opaque financial system, but they say they found the government unwilling to back an open investigation.

Both quit the group on Friday after they say Panama refused to guarantee the committee’s report would be made public. “I thought the government was more committed, but obviously they’re not,” Stiglitz said. “It’s amazing how they tried to undermine us.” The Panamanian government defended the committee’s “autonomous” management in a statement issued later on Friday, and while it said it regretted the resignations of Stiglitz and Pieth, it chalked them up to unspecified “internal differences.”

[..] In addition to embarrassing leaders worldwide who had interests tied to secretive business concerns, the leak heaped pressure on Panama, well-known for its lax financial laws, to clean up its act. “I have had a close look at the so called Panama Papers, and I must admit that even as an expert on economic and organized crime, I was amazed to see so much of what we talk about in theory was confirmed in practice,” Pieth said in a telephone interview. In the papers he said he found evidence of crimes such as money laundering for child prostitution rings. “We’re being asked to do this as a courtesy for them and we’re paraded in front of the world media first, and then we’re told to shut up when they don’t like it,” Pieth, a criminal law professor at Basel University, said.

Read more …

Long and strong summary by Kristi Culpepper. Damning.

Is Hillary Clinton Corrupt? An Archive of Financial Improprieties (Medium)

[..] Under Clinton’s leadership, the State Department approved $165 billion worth of commercial arms sales to 20 nations whose governments have given money to the Clinton Foundation, according to an IBTimes analysis of State Department and foundation data. That figure – derived from the three full fiscal years of Clinton’s term as Secretary of State (from October 2010 to September 2012) – represented nearly double the value of American arms sales made to the those countries and approved by the State Department during the same period of President George W. Bush’s second term.

The Clinton-led State Department also authorized $151 billion of separate Pentagon-brokered deals for 16 of the countries that donated to the Clinton Foundation, resulting in a 143% increase in completed sales to those nations over the same time frame during the Bush administration. These extra sales were part of a broad increase in American military exports that accompanied Obama’s arrival in the White House. The 143% increase in U.S. arms sales to Clinton Foundation donors compares to an 80% increase in such sales to all countries over the same time period.

[..] It’s really not all that difficult to see why Clinton hasn’t given a press conference in 244 days and avoids the media at her campaign events, is it? Asking her to explain every ethically questionable deal she has been involved in would probably take longer than the State Department requires to vet her emails.

Read more …

In just 20 years. Wow.

Average American 15 Pounds Heavier Than 20 Years Ago (HDN)

There’s no doubt about it: Americans are getting heavier and heavier. But new U.S. estimates may still come as a shock – since the late 1980s and early 1990s, the average American has put on 15 or more additional pounds without getting any taller. Even 11-year-old kids aren’t immune from this weight plague, the study found. Girls are more than seven pounds heavier even though their height is the same. Boys gained an inch in height, but also packed on an additional 13.5 pounds compared to two decades ago. When looked at by race, blacks gained the most on average. Black women added 22 pounds despite staying the same average height. Black men grew about one-fifth of an inch, but added 18 pounds, the study found.

[..] According to the report, the average weight of men in the United States rose from 181 pounds to 196 pounds between 1988-1994 and 2011-2014. Their average height remained the same at about 5 feet, 9 inches. The average woman, meanwhile, expanded from 152 pounds to 169 pounds while her height remained steady at just under 5 feet, 4 inches.

Read more …

Sep 022015
 
 September 2, 2015  Posted by at 2:56 pm Finance Tagged with: , , , , , , , ,  


Russell Lee Migrant family in trailer home near Edinburg, Texas Feb 1939

A few days ago, I joked to Nicole that Paddypower should by now have a bet open on how much longer the Schengen open border treaty will be valid in Europe. Didn’t check if they actually had one, mind you.

But it can’t be long anymore, so it wouldn’t be a big money maker even if it existed. I give it a few days at most. Italy just announced it wants guards at Brennero, one of its main border posts with Austria. One down, a few hundred to go, and they may go at a rapid clip.

Europe’s countries are not each other’s enemies yet, but they will shut borders. Germany pulled a fast one yesterday by telling Hungary to stop the trains from rolling west, but now Budapest has a big problem. They should have just allowed the refugees to board the trains and leave. Put them on a train, give them food and drink and make them first Austria’s and then Germany’s problem.

And Germany’s a fine place for the refugees to go, since Berlin is sort of the de facto capital of the EU, at least when that seems a profitable position to be in, but it’s not the perfect place to go, because Merkel and her ilk will denounce their leadership claims whenever that looks more beneficial in the polls.

Merkel and Schäuble can screw over Greece three ways to Sunday, but they’re like this Bill Pesek headline on Bloomberg two weeks ago about the Chinese leadership that said something to the effect that they like the power but not the responsibility. That’s at least as true for Europe as it is for Beijing.

And that makes it hard to call any supposed leaders on any of their responsibilities. It’s also why thousands of refugees have drowned and not one of the ‘leaders’ have lifted a finger. They’re there for the power, not the other stuff.

And that, as I’ve said a hundred times before, is embedded in the EU model, in its design, its regulations, its laws, the whole shebang. When I read that Yanis Varoufakis wants a pan-European anti-austerity movement, I’m thinking he doesn’t understand how it’s set up. The whole bureaucracy was made to resist change, democracy, and any challenges to its ‘belief’ system.

It’s no use saying the EU should do something or another in the refugee crisis, because it won’t. And what it may do will always be way too late and way too little. It’s how it was structured. The EU is geared towards accumulating more power, not solving its own problems.

But at the same time, Brussels is still the only capital the EU has. And that’s why all refugees, wherever they are at the moment, Hungary, Greece, Italy, Serbia, Macedonia, should be allowed to board trains, with enough humane facilities and provisions, bound for Brussels.

They should all be directed towards the European Parliament and/or other posh buildings – they recently opened a €1.2 billion one, that should facilitate a few refugees -, and stay there until the EU is forced to solve the issue.

And every single cameraman on the planet should be there to register what happens. How long they will be allowed to go without food, water and shelter. How long they will go without proper medical treatment.

Let’s see how Brussels deals with 50,000 -100,000 people in its streets and parks, with more coming every day, while the whole world is watching live on a hundred news channels.

And I know Strasbourg will want to dispute the claim that Brussels is the capital, and you know what?, I’m willing to send half of the refugees there too. Just so the French don’t feel left out or insultée or have their pride hurt.

And something tells me that the citizens of Belgium and France, like their Greek peers, will have the decency to feed and shelter the Syrian and Libyan mothers and children on their doorsteps while the ivory towers diddle.

It looks to me to be the only way to expose the EU for what it is, and then put an end to the macabre monstrosity it has become.

We would need to convince the refugees that by doing things this way, they would open the way for those who come after them, of which there will undoubtedly be many.

The Italian, Hungarian, Greek etc. governments should issue rail tickets from their countries to Brussels and tell the refugees that that’s where the European capital is, and to apply there for visas, asylum, and everything else.

Brussels lives by the adage of divide and rule. And that serves only the bureaucrats that inhabit the institution. Not the refugees, and not the people of Europe.

Oct 262014
 
 October 26, 2014  Posted by at 9:17 pm Finance Tagged with: , , , , , ,  


Dorothea Lange Resettlement project, Bosque Farms, New Mexico Dec 1935

The EU and ECB claim they conducts their stress tests and Asset Quality Reviews to restore confidence in the banking sector. That is easier said than done. The problem with the confidence boosting game is that if the tests are perceived as not strong enough, nobody knows which banks to trust anymore. And, on the other hand, if the tests are sufficiently stringent, there’s a genuine risk not many banks are found healthy.

There’s the additional issue of quite a large group of banks having been declared ‘systemic’ by their mother nations, which is of course equal to Too Big To Fail, and, in layman’s terms, ‘untouchable’.

All in all, after the results were announced today, it’s hard not to have the feeling that Europe aims at restoring that confidence by not telling us the whole story. There are a lot of numbers, but there are even more questions. Which may well be because those answers the leaders of the political and the financial world would want to see are simply not available, other than by making the tests even less credible.

Letting the numbers sink in, would the markets really feel more confident about European banks, or would they simply continue to have faith in the ECB’s bail-out desire for as long as that lasts? When I read that the ‘Comprehensive Assessment’ issued today states that the stock of bad loans in Europe is estimated, after the tests, at €879 billion, but banks’ capital shortfall only at €25 billion, I wonder where the confidence should come from.

The data. Starting with a Bloomberg piece from last Wednesday.

Don’t Be Distracted by the Pass Rate in ECB’s Bank Exams

The largest impact may be on Italian lenders led by Banca Monte dei Paschi di Siena, Unione di Banche Italiane and Banco Popolare, according to a report last month from Mediobanca analysts. They foresee a gap of more than 3 percentage points between the capital ratios published by the companies and the results of the ECB’s asset quality review. Deutsche Bank may see its capital fall by €6.7 billion, cutting its ratio by 1.9 percentage points, the analysts said.

The biggest lenders may see their combined capital eroded by about €85 billion in the asset quality review because of extra provisioning requirements, according to Mediobanca. That’s equivalent to a reduction of 1.05 percentage points in their average common equity Tier 1 ratio, the capital measure the ECB is using to gauge the health of the banks under study, the analysts said.

The AQR evaluates lenders’ health by scrutinizing the value of their loan books, provisioning and collateral, using standardized definitions set by European regulators. To pass, a bank must have capital amounting to at least 8% of its assets, when weighted by risk. The bigger the hit to their capital, the more likely lenders will need to take steps to increase it.

Banks the ECB will supervise directly already bolstered their balance sheets by almost €203 billion since mid-2013, ECB President Mario Draghi said this month, by selling stock, holding onto earnings, disposing of assets, and issuing bonds that turn into equity when capital falls too low, among other measures.

Those €203 billion the banks managed to acquire can be interpreted as positive, since they managed to do it, but it can also be seen as negative, because they needed it in the first place. It also raises the question whether another €203 billion would be just as easy. Not very likely, the low hanging fruit always goes first. Question then is, could they perhaps need another €200 billion? Brussels clearly says not, but Brussels is a figment of the imagination of politicians. Then, the New York Times today:

25 European Banks Fail Stress Test

Banks in Europe are €25 billion, or about $31.7 billion, short of the money they would need to survive a financial or economic crisis, the European Central Bank said on Sunday. That conclusion was a result of a yearlong audit of eurozone lenders that is potentially a turning point for the region’s battered economy. The E.C.B. said that 25 banks in the eurozone showed shortfalls in their own money, or capital, through the end of 2013.

Of the 25 banks [that failed the tests], 13 have still not raised enough capital to make up the shortfall, the central bank said. By exposing a relatively small number of sick banks – of the 130 under review – the central bank aims to make it easier for the healthier ones to raise money that they can lend to customers.

Italy had by far the largest number of banks that failed the review, with nine, of which four must raise more capital. Monte dei Paschi di Siena, whose troubles were well known, must raise €2.1 billion, the central bank said, the largest of any individual bank covered by the review.

… the review also uncovered €136 billion in troubled loans that banks had not previously reported. In addition, banks had overvalued their other holdings by €48 billion, the E.C.B. said.

That’s €184 billion in troubled loans and overvaluations. That leaves €19 billion of the €203 billion banks bolstered their balance sheets with, for all other shortcomings. Doesn’t sound like a lot. On to today’s Bloomberg summary:

ECB Finds 25 Banks Failed Stress Test

Eleven banks need more capital, including Monte Paschi with a gap of €2.1 billion. “Although this should restore some confidence and stability to the market, we are still far from a solution to the banking crisis and the challenges facing the banking sector,” Colin Brereton, economic crisis response lead partner at PwC, said. “The Comprehensive Assessment has bought time for some for Europe’s banks.”

Banks will have from six to nine months to fill the gaps and have been urged to tap financial markets first. The ECB’s stress test was conducted in tandem with the London-based European Banking Authority, which also released results today. The EBA’s sample largely overlaps the ECB’s, though it also contains banks from outside the euro area.

The ECB assessment showed Italian banks in particular are in need of more funds as they cope with bad loans and the country’s third recession since 2008. [..] “The minister is confident that the residual shortfalls will be covered through further market transactions and that the high transparency guaranteed by the Comprehensive Assessment will allow to easily complete such transactions,” Italy’s finance ministry said in a statement.

“The Comprehensive Assessment allowed us to compare banks across borders and business models,” ECB Supervisory Board Chair Daniele Nouy said in a statement. “The findings will enable us to draw insights and conclusions for supervision going forward.” The ECB said lenders will need to adjust their asset valuations by €48 billion, taking into account the reclassification of an extra €136 billion of loans as non-performing. The stock of bad loans in the euro-area banking system now stands at €879 billion, the report said.

Under the simulated recession set out in the assessment’s stress test, banks’ common equity Tier 1 capital would be depleted by €263 billion, or by 4 percentage points. The median CET1 ratio – a key measure of financial strength – would therefore fall to 8.3% from 12.4%. Nouy has said banks will be required to cover any capital shortfalls revealed by the assessment, “primarily from private sources.”

Striking to note that the ECB doesn’t rule out having to save more banks. Discomforting too. For taxpayers. But the main question mark remains the simulated recession: what were the assumptions under which is was conducted? Make them too rosy and you might as well not test or simulate anything. Unless of course window dressing is the only goal.

Bloomberg’s Mark Whitehouse writes about quite a different stress test, which quite different outcomes. Makes you think.

Testing Europe’s Stress Tests

What would a really tough stress test look like? Research by economists at Switzerland’s Center for Risk Management at Lausanne offers an indication. By simulating the way the market value of banks’ equity tends to behave in times of stress, they estimate how much capital banks would need to raise in a severe crisis. The answer, as of Oct. 17, for just 37 of the roughly 130 banks included in the ECB’s exercise: €487 billion ($616 billion). Deutsche Bank, three big French banks and ING Groep NV of the Netherlands are among those with the largest estimated shortfalls. Here’s a breakdown by bank:

And here’s a breakdown by country, as a percentage of gross domestic product:

The economists’ approach, based on a model developed at New York University, isn’t perfect. It could, for example, overestimate capital needs if the quality of banks’ management and assets has improved in ways that the market has yet to recognize.

And, because crises are rare, the modelers had scant historical data with which to build estimates of how banks might fare in future disasters. That said, this relatively simple model has some important advantages over the ECB’s much more labor-intensive stress tests. The Swiss group’s approach is free of the political considerations that constrain the ECB, which can’t be too harsh for fear of reigniting the European financial crisis. In addition, the model implicitly includes crucial contagion effects, such as forced asset sales and credit freezes, that the ECB’s exercise ignores.

A bit of back-testing suggests that the economists’ approach works relatively well. The NYU model’s projection for the largest U.S. banks’ stressed capital needs before the 2008 crisis, for example, comes pretty close to the roughly $400 billion that the banks actually had to raise. If the ECB’s number is a lot smaller than the figure the model comes up with, that won’t be a good sign.

The ECB’s Comprehensive Assessment says $203 billion was raised since 2013, leaving ‘only’ €25 billion yet to be gathered. The Swiss report says €487 billion is needed just for 37 of the 130 banks the ECB stress-tested. Of the banks the Swiss identify as having the greatest capital shortfalls, most passed the EU tests. Judging from the graph, the 7 banks in need of most capital have an aggregate shortfall of some €300 billion alone.

Among them the 3 main, and TBTF, French banks, who all passed with flying colors and got complimented for it by French central bank governor Christian Noyer today, but according to the Center for Risk Management are about €200 billion short between them. Which means France as a nation has a stressed capital shortfall of over 10% of its GDP, more than twice as much as the next patient.

Wouldn’t it better to let an independent bureau do these tests, instead of the ECB which obviously has huge political skin in the game? Or are we all too afraid of what might come out?

Will the markets actually feel more confident, or are they going to fake that too? Was this really a yearlong audit, or did it only take that long because the spin doctors needed to make sure the lipstick was applied correctly on the pig?

We all deserve better than a yearlong exercise in futile tepid air. But Europe’s taxpayers deserve it most of all.