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23 Jul, 2010 04:57

European banking stress tests a ho-hum for Russia

Exams for European banks are nearly over, with the results of stress-tests on ninety one financial institutions to be released on Friday. But analysts aren’t expecting major problems.

If too many banks pass the tests – it means the tests failed. That’s a widespread suspicion about the assessment of Europe's biggest lenders. The banks have been asked to estimate how much additional capital they would need under adverse scenarios. They haven’t been disclosed but are believed to include the economic situation deteriorating for two years, and a scenario with an additional sovereign shock. But Jennifer McKeown, European Economist at Capital Economics questions just how realistic the tests can be.

“It’s very difficult to say, partly because we don’t know what the so-called adverse scenarios that will be considered are just yet. We know that they’ll be considering a mild recession as perhaps a worse case scenario, which incidentally we don’t think is the worst case scenario, but we don’t know how great a probability they’re going to assign to the risk of a sovereign default, so what they do on that front will determine the results.”

The long waited results will be released late Friday after the European bourse close for the week-end, which is meant to avoid a panic on already nervous markets. But Paul Mackel, senior foreign exchange strategist at HSBC Bank believes the caution is excessive.

“There is been a number of officials coming out saying that banks in eurozone are in a good shape – going to pass. There has been a couple of banks saying that they could possibly fail, and the market already has good feel for these type of failures, so it may may end up as non event."

If London observers are not expecting much too exciting, in Moscow it is largely a non event, with analysts in complete consensus that the stress tests are almost completely irrelevant to Russia. Leonid Slipchenko, banking analyst at Uralsib Capital logically questioned whether seriously bad results – of the type which might create volatility in markets – would be likely to stem from tests. Undertaken by Committee of European Banking Supervisors, it wouldn’t be in the interests of European banking for them to come out particularly negative, particularly with the ECB recently called upon to look at buying bank bonds to shore up liquidity in the event of sovereign risks in Greece, Spain, Italy, Eire and Portugal.

“In fact, I think, that the importance of the stress test is overestimated, as whatever the real picture is, I doubt that European financial authorities are likely to come out with any negative announcement. My personal expectations are neutrally positive, so to say. There are a lot of quite stable banks in the European system and though some local problems could really be there, the system in general is quite ok.”

Slipchenko added that the direct impact of the tests for Russia – whether good or bad – was marginal.

“Being a globally important financial player, Europe will certainly have an effect on the rest of the world, including Russia, but as for our country that’ll be very indirect.”

More direct was Head of Research at Metropol, Mark Rubinstein, responding directly “The impact will be nil” when asked about the possible implications for Russia, and Maxim Miller, Associate Director at  FitchRatings responding likewise with 'We definitely do not expect any direct implications for the Russian banking system from the publication of these results.' 

With 3 largely state owned banks comprising an nearly three quarters of the domestic banking system, in addition to a state owned developed bank which has been used to channel funds from the $430 billion in reserves Russia still has available, Russian bankers will be following the stress test results with a largely detached interest.