In the last year, both the Federal Reserve and the European Central Bank (ECB) have run a number of stress tests to see how solvent or insolvent bank are in their respective regions. The Fed gave a blanket approval to all of the major banks. This meant they could improve their share prices by cashing emergency reserves and buying back some stock.
However, the ECB were a bit more extreme, as they allowed some banks, such as Deutsche Bank, to cheat on the tests and were passed even though they were on the border of being insolvent. It has now turned on its head to threaten the European financial system; similar to Lehman Brothers once did in America.
In the latest scandal to emerge involving Deutsche Bank, earlier today the FT reported that German’s largest lender was allowed to cheat, pardon was given “special treatment” by the ECB in the July stress tests. As part of the July stress tests results, which “promised to restore faith in Europe’s banks by assessing all of their finances in the same way” Deutsche Bank’s result was boosted by a “special concession” agreed to by Mario Draghi: DB’s results included the $4 billion in proceeds from selling its stake in Chinese lender Hua Xia even though the deal had not been done by the end of 2015, the official cut-off point for transactions to be included.
While the Hua Xia sale was agreed in December 2015, it has still not been completed and now faces a delay after missing a regulatory deadline last month, though the bank is still confident of completion this year.
As the FT notes, the Hua Xia treatment was disclosed in a footnote to Deutsche’s stress test results, and adds that “none of the other 50 banks in the stress tests had similar footnotes, even though several also had deals agreed but not completed at the end of 2015.”
As disclosed in the central bank’s summer stress test, Deutsche’s common equity tier one capital fell to 7.8% after it was “subjected to the stress tests’ imagined doomsday scenario of fines, low interest rates and low economic growth.” However, without the Hua Xia boost, the ratio would have been 7.4%, a level comfortably above regulatory minimums. Why the special treatment? Because the higher published result helped reassure investors who were growing increasingly nervy about the bank’s capital adequacy. – Zerohedge
The reason they were passed when they shouldn’t have been was because they didn’t make the banks have ’mark to market’ assets on the books. If they had used to ‘mark to model’ process, many of the leading banks would have not passed the tests and would require trillions of dollars in support.
What are your thoughts on this?