The Committee of European Banking Supervisors (CEBS) released the much anticipated results of the EU wide banking stress test exercise this afternoon. Seven banks failed the stress test and will require a combined total of €3.5 billion of new capital. The results are being met with some skepticism regarding the nature of the “adverse scenario” used by the examiners as well as the fact that the stress tests do not explicitly account for the possibility of sovereign default. In light of the uncertainty in the overall economy as well as the situation in Greece, the stress tests may fail to provide much reassurance regarding the stability of Europe’s banking sector.
At a time when most government officials in the executive branch and at the Federal Reserve continue to support the “bail out” approach, Thomas M. Hoenig, President of the Kansas City Federal Reserve bank and a voting member of the Federal Open Market Committee, has put forward an alternative prescription to deal with the troubled financial system. The text of Mr. Hoenig’s recent testimony before the Joint Economic Committee of the United States Congress requires close attention. Read this article for more details.
The financial markets appear to be on edge this week ahead of the government’s release of the methodology for “stress testing” the top banks which is set to be issued on Friday, April 24. Much of the attention has centered on the levels of tangible common equity held by banks and the protection implied by Tier 1 capital ratios. In an interview today, Warren Buffett made a number of comments related to this topic that regulators should consider prior to finalizing the stress test methodology.