EU Banks Able to Manage Exposure to Troubled Debt

by: Research Recap

A stress test by Moody’s of the largest EU banks concludes that their exposures to both sovereign and public sector debt and private sector loans in Greece, Portugal, Spain and Ireland are manageable relative to their current capital levels. The rating agency does not anticipate rating actions based on these exposures.

Based on our stress test, we believe that these banks would be able to absorb the losses that could arise from such exposures without requiring capital increases — even under worse-than-expected conditions - Jean-Francois Tremblay.

“The average regulatory capital ratio of the banks that we stress tested is well above 9%.”

Moody’s says the information gathered reveals that banks’ cross-border exposures in Greece, Portugal, Spain and Ireland to a range of private claims, such as residential mortgages and business loans, are greater than those related to government debt.

“Based on the severe loss assumptions made by Moody’s, a forced sale of sovereign debt at depressed market prices would have a greater, although still manageable impact when measured against banks’ capital levels. Such losses are unlikely because banks would be expected to repo these assets at the ECB instead of selling them should they need the liquidity.”

“Actual losses are also likely to be less severe than what Moody’s simulated because losses on private claims would take place over a number of years and should be partially offset through earnings.” (Click to enlarge)


FT Alphaville reports that Gary Jenkins at Evolution Securities is not convinced:

“Whilst the EU commitment to the no defaults policy holds this is merely a hypothetical exercise but even so, I cannot imagine what the markets would be like in reality if all of those countries debt was in a forced sale situation. Who exactly would be buying the bonds off the banks, and in the complete carnage, forget the capital, who exactly would be providing liquidity? This report might help to support the market because of the positive headline, but I do not consider it to have any basis in reality.”