Wildly divergent views on the extent and impact of stress tests on Europe's banks emerged as hopes of a convincing bailout plan quickly faded despite next Sunday's deadline for a solution to the banking crisis.
Analysts at Morgan Stanley reckoned the market had "misread the dimensions" of the on-going discussions of a capital injection for European banks. Led by Huw van Steenis, the Morgan Stanley analysts argued the markets were braced for banks to be told to take on twice the capital they would need. For example, they said that Royal Bank of Scotland – which some analysts have argued could need as much as €19bn(£17bn) – would not need anything.
The European Banking Authority, a London-based pan-European regulator, is believed to be assessing new information provided by 90 banks across Europe and calculating the new capital that might be required if banks' holdings of government bonds were to incur losses implied by market prices.
While the EBA is yet to confirm its analysis and what threshold it is using for capital requirements, the market believes it has set a benchmark of 9% of core tier one capital – higher than international requirements – prompting different interpretations of the implications for banks. Eurozone leaders have promised an outline of any bank recapitalisation plan on Sunday when the market wants receive clarity on the size and scale of any recapitalisation programme.
The Morgan Stanley analysts argue the markets have misinterpreted the 9% as including a full-blown reassessment of bank's capital based on economic conditions and other potential causes for losses and not just on the implications of losses on holdings of sovereign bonds priced at current market values.
"This means the capital deficit is €100bn (or more) – lower than the €220bn to €300bn in the market," the Morgan Stanley analysts said.
In contrast, analysts at Deutsche Bank reckon the shortfall will be €375bn but note that much depends on how the tests are applied, what losses are assumed and the threshold level set for capital.
"If the authorities fix it lower at a 7% target, the recapitalisation falls to around €155bn for the entire sample and €146bn for the Euro area, even under our adverse assumptions including loan losses"."It seems clear that while the core European countries like France and Germany may not need any capital raising at lower thresholds, they would need to raise sizeable amounts at 9%," the Deutsche analysts said.
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