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    Enzio von Pfeil

    The Economic Clock® Blog

Dr. Enzio von Pfeil

A seasoned global economist. Enzio von Pfeil’s skill lies in understanding macro-economics, the business cycle and business operations. Hong Kong-based Enzio von Pfeil has an international education which culminated in studying inter alia under Prof. Friedrich von Hayek. He has a distinguished 34+ year career (US, Germany, UK and Hong Kong) in macro-investment economics.

His understanding of currency, commodity, bond and equity movements as they relate to socio-political developments across the global economy, underscores the authority and integrity of his Economic Clock® Blog.

Media Presence

Author of five books, and with a 30-year global career as an investment economist in the USA, Germany, UK and Hong Kong, Enzio von Pfeil is a professional speaker and commentator on Reuters, Bloomberg and ChannelNews Asia on economic impacts on markets, industry sectors and corporations.

Strategic Asset Allocation

Sunday's stress test results: just how much capital must be raised?

Saturday, October 25, 2014

  1. Tomorrow. Just yesterday we released a piece outlining a hitherto pretty disregarded event: the release of the European Central Bank's (ECB's) stress test results ( her "Comprehensive Assessment") for 130 banks, covering 85% of all regional banking assets. (Meanwhile, a second set of stress tests are being conducted. These are by the European Banking Authority; they cover the entire EU area.)
  2. Rumour. Rumour has it that banks already were  notified privately this Thursday of their results. They will have a fortnight to address any shortfalls in capital, i.e. until around Friday, 7th November.  
  3.  Ugly ducklings. According to today's Financial Times (FT), "About 25 banks are expected to fail the ECB's landmark health checks, although many of those have already taken sufficient action this year to strengthen their finances..."  "About 10 of the banks with shortfalls may still need extra capital, which will trigger intensive discussions with regulators in the ensuing weeks over how the problems will be tackled."
  4. Will  the ECB reveal all? "There are questions in the markets over whether the stress tests will  reveal all the problems (of banks, ed.)...For example, will they factor in earnings from the 'carry trade' where banks borrow cheap money from the ECB and buy higher-yielding government bonds?"
  5. Key issue: extra capital needed.  "One near certainty is that banks will be preparing to raise more capital. Salman Ahmed, fixed income strategist at Lombard Odier, says the tests will lead to €40bn - €60bn of extra capital. But there is a balance to strike: too little and the ECB loses face; too much and it could unwittingly spark a sell-off."
  6. Trigger points for market panic.  Mr. Ahmed goes on to state that  "If the demands for capital hikes total less than €30 bn, the exercise runs the risk of losing credibility and markets won't trust the results and will just fall back on their own homework...On the other hand, anything higher than around €65 bn will push markets to question the health of the European financial sector."
  7. Even if extra capital is raised: will banks lend more?  There remain weighty doubts about the lending capacity of many banks - even if they receive the regulator's thumb's up. This is reviewed by Alberto Gallo, strategist at RBS: "The problem is that about one third of banks are plagued by low capital and low profitability, and tare not likely to lend. Most banks will pass (the stress tests, ed.) - but that doesn't mean that the system is healthy."
  8. Investment implication. There really are easier things to invest in and make money, e.g. a good US index ETF.  Don't waste your time on European banks, whose shares very well could fall in the near term and then rebound once markets have gauged risks properly. Short the Euro, the currency used in Europe's welfare museum.
  9.  Read more