The term “bank stress test” has been floating around in the news quite a bit lately with the Europe testing its banks to rebuild investor confidence. China will now join in the fun and conduct one of its own. Last year, China carried out stress tests with the assumption of home prices dropping by up to 30 percent; this time around, China said it would make the test even more rigorous, testing the ability of its banks to withstand home prices falling as much as 50 to 60 percent in cities where prices have risen the most dramatically. The tough standards of China’s stress test makes Europe’s own stress test look like a farce.

While the move suggests that Chinese policymakers are concerned about the health of the real estate market, it also shows, as usual, the communist government’s pre-emptive and no-nonsense approach in managing its economy. The severity of the adverse scenario (up to 60 percent price decline) to be used in the stress test in the most lucrative real estate markets is more policymakers wanting to make sure its banks can handle the worst case scenario rather than them believing that a 60 percent drop would really happen.Read more...

The European bank stress tests were completed a couple of weeks ago in an effort to reduce investor anxiety, but now U.S. banks are coming into the spotlight again after the International Monetary Fund (IMF) announced its own findings. IMF’s report on the U.S. financial system concludes that while the U.S. banking system is stable for now, it is not out of the woods. Banks would need to raise billions of dollars in the event of deterioration in the real estate market and the general economy. Banks could need an additional $76 billion to meet their capital reserve requirements in an adverse scenario. Read more...

The results of the stress tests on EU banks, meant to assure the public that the banks have enough capital to survive if the debt crisis worsens, are out. More than 90 banks were tested, and with the exception of 7, all passed. Going in, as the tests were meant to be a calming pill for investors, the vast majority of the banks were expected to pass, so the results were no surprise. As in the case with the U.S. bank stress tests more than a year ago, there’s plenty of skepticism whether the stress tests were rigorous enough or were they merely for show. For example, what would happen in the event of a sovereign debt default—the scenario that most fear could trigger a full blown financial tsunami—was not even tested. The banks that failed (five Spanish savings banks, an already nationalized German mortgage lender and Greece’s ATEbank) will have to raise €3.5 billion total over a period of time still to be determined.

The euro has rallied in July after falling to a four-year low in June, on some signs that European economies aren’t as bad as feared and the beleaguered countries like Greece, Spain, and Portugal appear to have satisfied debt obligations for the time being. The stress test results have been treated as positive reinforcement, even though their execution was likely flawed (or not “stressful” enough).  Read more...