Spanish Bank Stress Test

The problem with the Stress Test is no one believes it is based upon a truthful set of bank data nor on a likely set of ‘stressful’ conditions.

Other than those two minor points its all pure gold.

Bank tests are the modern equivalent to old fashioned militarty manoeuvers. You know the kind practiced by all European armies in the lead up to WWI. All about looking good. Nothing about how it might funcation in battle. Lots of neatly dressed units marching from here to there in order to stand in a neat square. All pre-scripted. Every outcome decided before hand. Bore no resemblance to actual battle but looked nice. Made the generals look dashing and gave the lords and ladies something to watch

That is basically what Bank Stress Tests are in reality. Can you imagine any scenario in which any government is going to contemplate a tset that might decrease confidence in any bank let alone all the banks? Of course not. So right there we know the outcome any test has to have before the test is even drawn up.

Requirement one – all banks must pass.
Requirement two – a few should need ‘improvements’ of a sufficiently trivial kind so that we can say they are already in hand and easily coped with.

Any other outcome would just not help in the effort to ‘encourage confidence’, ‘stabilize’ the markets and help banks regain access to Bond market funding.

We all know this. Our governments have made it too obvious for too long with all their talk of confidence, that confidence is indeed what it is all about not truth. They can’t really put that particular genie back in its bottle now.

The probelm for Spain, is everyone knows there the Caja’s have told half truths – both offically sancionted ones and un-official ones. The caja’s have NOT come clean about the amount of non-performing loans they have. And even less have they been honest or I should say ‘realisitic’ about the value of all of the properties they currently hold.

On top of which they are now trying very hard to sell these properties and get them off their books befoe they have to comply with the new directives from the Bank of Spain about re-valuing what they hold. The result is that the Caja’s are now, in the depths of a recession, when they are quite unable to access wholesale funding in the Bond market – they are now advertising 100% loans with a deferred deposit ie nothing down up-front and teaser loans. So not only are the Caja’s hiding a lot more bad debt and losses on property they hold, but they are also selling loans that are 100% guarenteed to turn bad.

In a sense why would they be honest? The first to be honest goes under. No question. Ones who hold to the lies might survive longer and get saved by a bail-out later, when the whole things becomes a Greek-style crisis. What real risk do the owners and directors of the Caja’s run by continuing to be economical with the truth? No risk! They are not going to go to gaol, are they? They know that. But if the tell the truth, they are certain to be ruined. So there is no incentive to ‘help clear up the mess’. And every incentive to play along with hide and pretend.

Just like there was never any incentive fr a captain to tell his general that his troops and his officers were only good at looking good on parade grounds and would be slaughtered if ever required to actually fight. So no one said a word. And later they all died.

That is what has been happening and will contiunue to happen in the Spanish banking sector until such time as something too large to control blows its top.

I should add that the Spanish are NOT alone in this at all. Every country has its own version of this mess. Just look at PNB Paribas being downgraded and Credit Agricole’s share price slide. Everyone knows they too are badly exposed to Southern European, Balkan and, I think, still US bad loans.