I am going to make this one quick but I thought it was necessary to call attention to this issue because it highlights how opaque the banking landscape in North America and Europe presently still is. Nationalised Dutch lender SNS Reaal, the fourth largest bank in the Netherlands, has recently been nationalised despite a reported 13 percent Tier 1 capital level in the most recent round of banking stress tests in Europe (pdf here). Clearly, the stress tests weren’t particularly stressful. I would go so far as to say they were ‘phony’. As Citi Chief Economist Willem Buiter warned in the Dutch press last month, more writedowns are unavoidable, especially if house prices in the Netherlands continue to decline.
FT Alphaville has a good post on the SNS Reaal issue that I highly recommend. The long and short of it is that bank accounts are opaque and we cannot rely on stress tests to tell us anything valuable about the safety and security of a banking system. I have noted the problem with stress tests in the US and Europe on numerous occasions here at Credit Writedowns (see my posts tagged ‘stress tests‘). The general gripe with stress tests that I have is that they are never useful from an accounting perspective because bank accounting is highly dependent on the valuation of bank assets i.e loans. Stress tests are simply a vehicle by which governments can calm nerves, if they are conducted in a relatively differentiated manner. For example, in the US some banks like JPMorgan Chase did well while others like Bank of America and Citgroup were deemed undercapitalised. So stress tests are a sham PR exercise only. And the SNS nationalisation demonstrates this. According to the European Banking Authority all four Dutch banks passed the last stress tests with flying colours (link in Dutch).
Today we learned, courtesy of the Dutch press that SNS Reaal will not release its yearly accounts as expected on Thursday (link in Dutch). Instead it will delay release until April when it will be better able to conduct the ‘cleansing’ necessary to reflect the reduced capital that goes along with anticipated credit writedowns. We should have seen something like this coming. Just last month, economist Willem Buiter warned that he expected more writedowns at Dutch banks. My translation read:
Buiter expects that writedowns will be unavoidable if prices fall further, for example by 20%. “Or if the recession continues for another year – as expected. Then the political pressure (writedowns of outstanding debts, etc) will therefore be bigger,” Buiter said in an interview published this morning in the Financieel Dagblad.
‘As regards the economic arguments, it will be difficult to resist. Already, 800,000 households are underwater. If prices fall another 20%, that’s a million,” said the economist.
And note that Buiter was talking about prices falling another 20% in the Netherlands. We should be watching events there closely because the Netherlands is in the core of Europe and these events point to private debt stress in the Netherlands, where the levels are the highest in the whole euro zone. I would expect that stress to be reflected in larger than expected fiscal deficits and the concomitant austerity that is now Europe’s fiscal policy choice in dealing with them. As always, Europe’s macro economic outlook is weak.
Note however that there is an increasing possibility of backloading this austerity because of the difficulties so many countries are running into in meeting their targets.