12 Charts That Expose Europe's Bank Stress Tests As Way Too Easy

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A Morgan Stanley report called “Transparency & Spanish stresses help, although lots of missed opportunities” shows how Europe’s bank stress tests were far more harsh towards nations such as Greece and Spain vs. other European nations such as Germany, France, the U.K., and Ireland.

While it makes sense to assume harder conditions in weaker economies, when creating a negative economic scenario in a stress test, were the stress tests too easy for certain nations?

First, here are the main economic assumptions for GDP and unemployment. Note how in the adverse scenario they still assume positive GDP growth for the UK in 2011.

Source: Morgan Stanley

Now look at how they assumed property prices could be hit. Italy, Greece, and France are given rather modest downside scenarios.

Source: Morgan Stanley

Source: Morgan Stanley

Assumed default rates were markedly lower for nations such as Ireland, France, and the UK. They're lower than Germany's even.

Source: Morgan Stanley

GDP stresses could have been harder for core European nations such as France and Germany

Source: Morgan Stanley

Source: Morgan Stanley

Core European nations could have had higher loss assumptions for corporate bonds

Source: Morgan Stanley

Stress tests could have been harder when assuming probability of default for nations such as France, Ireland, and the UK

Source: Morgan Stanley

Source: Morgan Stanley

Pre-Provision Profits (PPP) for banks were higher in the stress test than in Morgan Stanley's negative scenario

Source: Morgan Stanley

They could have been tougher by addressing 'quality of capital'

'Capital raising: failure to address quality of capital a missed opportunity, and much local interpretation

...On top of those banks that officially failed the tests, a number of banks have resulting Tier 1 ratios between 6% and 7%. Outside of the Spanish and Greek banks, there is NordLB (6.2%), Monte Dei Paschi (6.2%), AIB (6.5%), Deutsche Postbank (6.6%), UBI Banca (6.8%), BPIM (7%).'

Source: Morgan Stanley

Some nations' banks would need a lot more capital to achieve decent balance sheets

Tier 1 capital is basically a measure of equity capital as a % of a bank's total loan assets. (With assets adjusted for risk levels). Higher is better, and here it shows more capital would be needed for many banks in order to have more comfortable Tier 1 ratios.

Source: Morgan Stanley

Some nations are stronger than others, but even so, it appears some assumptions could have been stressed a little further.

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