Most Banks Pass EU’s Stress Test

Here’s the bad news – the European Central Bank (ECB) failed 25 of 130 lenders in its assessment of the quality of bank balance sheets and their ability to withstand times of economic stress.

 

Now for the good news – none of Europe’s largest banks were found lacking. No French, German or Spanish institutions were required to raise more capital.

 

The European Banking Authority (EBA) had put 123 banks in 22 countries through the stress test, which was carried out by the ECB and national supervisors. It provided the so-called fully loaded capital ratio for the first time. The ECB also released the results of its Comprehensive Assessment in Frankfurt yesterday as it prepares to assume oversight of euro-area banks on 4^th November.

 

To pass in the EBA’s baseline three-year scenario, which followed European Commission economic forecasts, a bank’s ratio of common equity Tier 1 to risk-weighted assets had to remain above 8 percent. In the “worst case scenario” which included a hypothetical recession and bond-market collapse, the pass mark was 5.5 percent. The results are based on banks’ balance sheets at the end of 2013.

 

A total of 25 lenders failed the European Banking Authority’s stress test with a capital shortfall of 24.6 billion euros. Deutsche Bank AG, Germany’s largest lender and the world’s largest Forex trader, is poised to pass the stress tests. The lender’s common equity Tier 1 ratio is expected to stand at about 8.8 percent under the severe stress scenario and at about 12.6 percent in the baseline scenario.

 

The EU overhauled its banking laws last year, toughening the capital requirements banks must meet to operate in the bloc. The legislation, known as the Capital Requirements Regulation, lists a range of instruments that banks will be forced to remove from their calculations of core capital in the years ahead.

 

These include goodwill, an intangible asset that arises when a company is acquired for a price above book value, as well as defined benefit pension fund assets and some kinds of deferred tax assets. Most of the phasing out must be completed by 2019.

 

In China, Song Quoqing, an academic member of the People’s Bank of China (PBOC) monetary policy advisory committee, said at a forum in Beijing last week that China’s economic growth will slow to 7.2 percent in the 4^th quarter of 2014. This is lower than the reported 7.3 percent growth for the 3^rd quarter, which was already the lowest in five years.

 

Ironically, the two main reasons that fueled China’s rise to become the world’s second largest economy – exports and property – will be the main cause of China’s slowing growth for the next few quarters.

Top News This Week

New Zealand: Official Cash Rate. Thursday, 30^th October, 4am.             
I expect figures to remain at 3.5%.

USA: Advance GDP q/q. Thursday, 30^th October, 8.30pm.            
I expect figures to come in below 3.3% (previous figure was 4.6%).

Trade Call

Short EUR/USD at 1.2675

On the H1 chart, EUR/USD is moving in a range after a 200 pip drop from 21^st October. I expect the euro to head up slightly due to the “good news” of the EU stress test. Good in a sense that although 25 lenders failed the test, none of the big banks require more capital.

 

This is also the week where the Federal Reserve is expected to remove the final stimulus of USD15 billion. If that happens, EUR/USD will start to fall as traders start to focus on the Fed’s interest rate hike. An entry is taken at 1.2675 once prices start falling, and a 45 pip stop loss is placed slightly above the conversion level. We will have two targets on this trade, exiting the first position at 1.2630 and the second one at 1.2585.

 

Entry Price = 1.2675
Stop Loss = 1.2720
1st Profit = 1.2630
2nd Profit = 1.2585

 

Sources: (As written on BTInvest, 27 October 2014.)

 

Note: The information in this article has been obtained from sources believed to be reliable. Its accuracy or completeness is not guaranteed and opinions are subject to change without notice. This article is for information only and not to be construed as a solicitation for contracts. We accept no liability for any direct or indirect loss arising from the use of this information.