They don’t want to spook people by reporting big holes in the banking system, if that’s what they find

TO BE NOTED: From Bloomberg:

"EU Bank Regulators Plan Stress Tests to Examine Risks (Update2)

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By John Rega

May 12 (Bloomberg) -- European Union bank regulators will conduct confidential stress tests by September, stepping up scrutiny of risks after lenders absorbed more than $1 trillion of losses and writedowns in the global financial crisis.

Regulators in the 27 EU countries will report overall data, not results for individual banks, to finance ministers and the EU’s executive arm, said Efstathia Bouli, a spokeswoman for the Committee of European Banking Supervisors in London. They don’t plan to publish the results.

The program, the second such review run by CEBS, examines sources of risks across financial markets, after EU states have pumped almost 3 They don’t plan to publish the results00 billion euros ($411 billion) of capital into lenders and offered 2.5 trillion euros in guarantees to help weather the crisis. The tests won’t assess banks’ capital needs, in contrast to the U.S. program completed last week.

“They don’t want to spook people by reporting big holes in the banking system, if that’s what they find,” Dominic Bryant, an economist at BNP Paribas in London, said in a telephone interview. Any such finding would “put pressure on banks to shore up their finances and be less risky in the future.”

After the crisis rippled through U.S. and U.K. banks, lenders in continental Europe, such as in Spain, are likely to make losses this year as their domestic economies contract, according to Bryant.

Among EU banks, losses and writedowns from the crisis have hit hardest in Britain, led by HSBC Holdings Plc and Royal Bank of Scotland Group Plc, according to Bloomberg data.

Calm Investors

U.S. regulators found that 10 financial companies led by Bank of America Corp. need to raise a total of $74.6 billion of capital, in results made public on May 8. Releasing the findings helped calm investors, said U.S. Comptroller of the Currency John Dugan, who oversees national banks, said today at a conference in Washington.

The tests are “an assessment of the European financial system, to test its resilience to shocks and to contribute to best practices,” Bouli at the CEBS said in a telephone interview. They are part of a “regular risk assessment” mandated by the EU’s executive arm, the European Commission.

The CEBS designed a “common scenario,” which won’t be disclosed, to see how banks would perform in such an environment, according to Bouli.

Kirsty Clay, a spokeswoman for the U.K.’s regulator, the Financial Services Authority, declined to comment immediately.

Policy makers in Europe “need to subject financial institutions to rigorous stress tests,” Marek Belka, director of the International Monetary Fund’s European department, told journalists in Paris today. “Impaired assets need to be isolated from the rest of the financial sector.”

To contact the reporter on this story: John Rega in Brussels at jrega@bloomberg.net."

Their anti-crisis strategy is to hope the US and China deliver sufficient growth to pull Europe out of recession

TO BE NOTED: From the FT:

"Like a fish, Europe is rotting from the head

By Wolfgang Münchau

Published: May 10 2009 18:58 | Last updated: May 10 2009 18:58

Helmut Schmidt, the former German chancellor, last month made an astute observation: “The European Central Bank is the only institution in Europe that works well.”

It is a remarkable statement in several ways. It implies of course that the other European institutions are not working well. I am afraid this is true. I have on previous occasions criticised the unco-ordinated policy response of Europe’s political leaders. Their anti-crisis strategy is to hope the US and China deliver sufficient growth to pull Europe out of recession. That will probably not happen this time.

But there is another, less frequently discussed dimension to Europe’s mistaken policy response. The European Commission, the executive arm of the European Union whose job is to implement the region’s law and to drive its policy agenda, has failed abysmally in this crisis. The Commission was largely absent during the worst months of last year, and its subsequent responses fell consistently below what one would expect.

Of course, the Commission is not a government. It has only a small budget, no powers to raise taxes or issue bonds, and it operates under strict guidelines. But as various dimensions of economic policy are now integrated across Europe, one would expect the Commission to play a leading role as a co-ordinator and as a source of new ideas to fight the crisis.

The problem with the Commission is not its civil servants. In the absence of political leadership, they apply the rules as they are, for example when they recommend brutal and politically suicidal wage cuts in Latvia, when they apply accession criteria to the eurozone with no flexibility, or when they produce ineffective financial regulation. These are not causes of the problem but mere symptoms of a lack of political direction.

There is a saying that the fish rots from the head, and this is exactly what has been happening here. There is nothing in European politics that stinks more than the apparent inevitability of another five-year term for José Manuel Barroso, the Portuguese president of the Commission. He spent most of the last few years on his bid for re-election rather than doing his job. If the centre-right wins the elections to the European parliament, as everybody seems to expect, nothing can stop Mr Barroso’s bandwagon.

This state of affairs sends out a disastrous message – that job performance is irrelevant and that Europe has already reverted to business as usual. Mr Barroso is a conservative from a small country, who followed a socialist from a large country. Europe’s top jobs are not awarded on the basis of electoral success, but on whether you fit into an opaque political matrix.

In the case of a Commission president who has already served for five years, one would expect that he should at the very least be able to answer the questions: What exactly did you achieve during your first term? And what is your big idea for the second?

In my view, Mr Barroso is among the weakest Commission presidents ever, a vain man who lacks political courage. He and his supporters will tell us that his big achievement is his dogged pursuit of the Lisbon agenda, a programme to boost Europe’s international competitiveness. Another supporter of Mr Barroso told me that his biggest legacy was the decision to set up the De Larosière committee, named after a former central banker whose group produced a moderately ambitious report to reform Europe’s system of banking supervision. Okay, let us give him some credit for that.

I suspect his big idea for the next five years is to relaunch the Lisbon agenda, and waste another five or 10 years on voodoo economics, and diverting attention from real and urgent policy issues, such as a more coherent system of economic crisis management.

Everybody in Brussels is saying that Mr Barroso’s reappointment is almost a done deal. I suspect they are right. Ms Merkel apparently finds him a congenial and pliable Commission president, and the Socialists are too incompetent to field their own candidate. Gordon Brown, the British prime minister, is also supportive. Nicolas Sarkozy is not a fan, but then the French president is not a supporter of a strong and self-confident European Commission either, so Mr Barroso might suit him well for that reason. Silvio Berlusconi, the Italian prime minister, has other problems at the moment.

There are still a few potential obstacles to Mr Barroso’s re-election. The European elections might not go as well for the Christian Democrats as they hoped, and the centre-right might end up too fragmented. It is possible that the outcome of the second Irish referendum on the Lisbon treaty will have a bearing on the decision, which is why Mr Barroso wants EU heads of government to decide on his reappointment at their meeting next month, rather than in October, as Mr Sarkozy recently proposed.

So it is not quite game, set and match yet, but it is as close as it could get at this stage. This is all very depressing. Mr Schmidt is right about the ECB. Indeed the central bank made a number of good decisions last week, when it delivered a robust policy response to the crisis.

But I never thought that we would ever celebrate a central bank as the only political institution that really works in Europe. How did we get there?

munchau@eurointelligence.com"

“In the end, either banks will have to be nationalized or have their bad loans split off into another institution."

From the NY Times:

"In Europe, New Efforts to Bolster Lending

By DAVID JOLLY

PARIS — After a first round of costly bank bailouts and stimulus programs came up short, governments in Europe and the United States are moving more forcefully to assure that bailed-out banks lend more money( MORE LIKE DON'T NEED TO HOARD MONEY ) to offset the recession that has engulfed both continents.

On Monday, a day after officials of the incoming Obama administration promised to take steps to force banks to lend, Britain outlined details of a new £100 billion, or $147.5 billion, plan to limit banks’ losses from troubled assets in exchange for their pledge to increase the flow of credit.

“In return for access to any government support, there will have to be an increase in lending, and that will be legally binding,” Gordon Brown, the British prime minister, said.

As if to illustrate the depths of the problem, the Royal Bank of Scotland warned on Monday that it faced losses of up to £28 billion or $41 billion for 2008, a record for any British company. The bank’s already depressed shares fell nearly 67 percent, touching off a rout in European financial stocks that could extend to United States markets when they reopen on Tuesday.

The second round of efforts in Britain and Europe to jump-start lending comes as the region girds for a more painful recession than expected. The European Commission warned on Monday that the 27-nation European Union faced a “deep and protracted recession” that would shrink the economy by 1.8 percent in 2009 and cut 3.5 million jobs across the bloc.

Adding to the sense of urgency, Standard and Poor’s ratings agency downgraded Spain’s sovereign debt from its AAA rating. Greece’s sovereign debt was cut on Wednesday, rekindling worries about what might happen to the euro zone as a whole if a member were to default on its public debt.

The bleak prospects have prompted leaders to try other ways of urging banks to lend as it becomes more clear that the bailout measures pledged by governments at the height of the financial crisis in autumn have not flushed away the bad loans that still clog the system( THEY ARE STILL BEING CALLED ). If anything, the problems are set to worsen as the downturn accelerates( YES ).

President Nicolas Sarkozy of France is to meet on Tuesday evening with French bankers to press them to lend more money to French businesses. “The banks must understand that the times have changed,” Christine Lagarde, the finance minister, told a business daily, Les Échos, on Monday. The French plan would require banks receiving new capital injections to make “precise commitments,” including giving up bonuses this year, she said.

Late Sunday, Denmark announced an $18 billion aid plan for its banks, saying it would inject the funds on the condition that the recipients increase lending.

In Germany, Deutsche Bank’s chief executive, Josef Ackermann, who is also chairman of the Institute of International Finance, an organization of the world’s largest financial institutions, suggested last week that the creation of so-called bad banks might be the way forward( A POOR WAY, BUT IT IS A WAY. ).

In a bad-bank arrangement, governments would buy up scorched( ANOTHER NEW TERM? ) assets, said George Magnus, senior economic adviser at UBS Investment Bank in London. That contrasts with the method now being used in the United States and Britain, where troubled assets remain on the balance sheet, but losses beyond some limit are insured by the government.( COULD ALSO WORK. THE GUARANTEE IS THE IMPORTANT THING TO ENDING THE CALLING RUN. )

“There is no ‘right’ way and both schemes have their merits and drawbacks( A FAIR POINT ) under given and local circumstances,” Mr. Magnus wrote in a research note. He said the bad-bank plan might be more suited to the United States, while Britain might be able to manage with its plan for an insurance program because it has far fewer banks.

Members of the incoming Obama administration are considering proposals that include buying up bad assets, a return to the original vision of the $700 billion Troubled Asset Relief Program.

“The focus isn’t going to be on the needs of banks,” Mr. Obama’s chief economic adviser, Lawrence H. Summers, said on the CBS program “Face the Nation.” “It’s going to be on the needs of the economy for credit.”

Simon Adamson, a banking analyst at CreditSights, an independent research firm in London, said he thought that Europe was also “edging toward the creation of bad banks.”

Under Britain’s latest bank bailout, its Treasury will “protect financial institutions against exposure to exceptional future credit losses on certain portfolios of assets” in return for a fee. Participating institutions will take the initial losses, with the Treasury bearing about 90 percent of the rest( YIKES ).

Britain’s central bank could buy up to £50 billion worth of “high-quality assets” from banks, giving it more monetary policy tools after it cut its benchmark interest rate to a record of 1.5 percent this month. The government is also extending measures to increase liquidity, including a £250 billion program to let banks to issue government-backed( THE GUARANTEE IS THE IMPORTANT THING ) bonds. The latest steps would cost taxpayers an additional £100 billion on top of the £37 billion plan announced in October and a £20 billion stimulus plan announced in November.

Mr. Brown said he was angry at Royal Bank, whose losses include as much as £20 billion of good-will write-downs from the acquisition of a portion of another bank. “Almost all their losses are in the subprime markets in America and related to the acquisition of the bank ABN Amro,” he said. “And these are irresponsible( NEGLIGENT ) risks, which were taken by a bank with people’s money in the United Kingdom.”

European bank stocks fell sharply on Monday on fears that more pain, including the wiping out of some shareholders, might lie ahead( TRUE ). Last week, the Irish government nationalized the Anglo Irish Bank, rendering equity stakes worthless.

Peter Dixon, a global equities economist in London for Commerzbank, said the latest British rescue plans were “a step in the right direction.” But, he added, “In the end, either banks will have to be nationalized or have their bad loans split off into another institution. That’s the only way they will be clear( GUARANTEED. ONLY THE GOVERNMENT CAN DO THIS. ) about their capital positions( YEP ).”

Carter Dougherty contributed reporting from Frankfurt."