JPMorgan Shreds The Stress Tests, Says 54 Banks Should Have Failed, And That Investors Will Lose Confidence

stress

Photo: JPMorgan

Well, count JPMorgan analyst Pavan Wadhwa among those who think the stress tests were a joke and that only bad can come now.Here are the key bullet points:

The European bank ‘stress’ tests were anything but;
just 7 banks failed with a paltry €3.5bn total capital
shortfall…

• …due to a lack of rigour in macroeconomic stresses,
leading to low portfolio loss rates…

• …and the fact that sovereign haircuts were applied
only to trading books and not to accrual books

• Our estimates show that the lack of rigour in CEBS
stress scenarios resulted in a 1.7% upward bias to
Tier I capital ratios…

• …and the focus on Tier I (not core Tier I) resulted
in a 1.2% lower capital hurdle…

• …for a total bias of 2.9% in Tier I capital ratio
estimates

• Eliminating this bias suggests that 54 banks would
have failed a more stringent stress test, generating a
capital shortfall of €60-75bn

• We believe that the stress test results will fail to
restore financial confidence, leading to lower yields,
wider spreads, lower EONIA, and a flatter EONIA
curve

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