Posts Tagged ‘asset quality review’

Notes From Underground: European Stress Tests Have Passed; Now All Trading Stress Begins

October 27, 2014

After the release of the asset quality review yesterday, analysts had time to digest the information and form a modicum of market opinion prior to Monday’s market opening. I give the European authorities credit for releasing reams of information on a Sunday so the market would not be merely reacting to headlines and tweets and could actually trade on substance rather than fluff. The FED could learn a great deal about how to disseminate information from the European authorities. Yes, I know that the results were leaked on Thursday or Friday but the leaks were not significantly market-moving events. The market’s initial reactions to the 25 undercapitalized banks was a rally in the European equity markets and a short-lived rally in the European peripheral bond markets.


Notes From Underground: Why Draghi Needs to Phony the Impending AQR Results

October 5, 2014

In the mid-October the ECB will announce the results of the Asset Quality Review (AQR), which is a bank stress test by another name. The ECB has measured the riskiness of the European domestic banking system in an effort to measure how much capital banks will need to raise to prevent systemic solvency problems. It is an act of absurdity in some regards because many of Europe’s banks have bought huge amounts of sovereign debt (i.e. Italian and Spanish banks purchasing Italian and Spanish bonds and notes) because they carry a zero risk weighting, requiring no reserves. The problem is that the banks’ assets hide the poor financial health of the banking sector. While European governments are able to borrow at ridiculous rates, private individuals are not able to access credit, which keeps the European economy at a standstill. If the bank stress tests don’t show a dire situation then Mario Draghi will be hard pressed to achieve the massive QE program he would like to undertake.