The Spanish bank will pass the latest European stress tests considering that it met additional capital requirements that the EBA deemed necessary in order to avoid a worse case capital scenario. Still, the nearly unanimous approval will easily translate to the markets considering the stress test method that was used, because it excluded from its calculations various financial instruments that are designed to hide expected losses.
So even though the bank has technically passed with a good grade, in some cases its true financial state is less than clear.
Considering the argument for homogenizing the tests applied to financial firms throughout Europe, the EBA?s is required to include these instruments in their stress tests in the future. Assessing the instruments´value should be critical for determining whether a lender will pass the test or not
A worthless note
To feed the confusion about whether there will be failings in Spain or not, the Minister of the Economy, Elena Salgado, assured last Monday that indeed some lenders will fail the tests.
What Salgado should clarify is that this failure doesn´t mean anything considering that determining whether a lender needs backing or not is calculated when adding other resources to its balance sheet. Generic provisions are an example of one such addition.
This confusion, according to some Spanish lenders that the EBA is investigating for penalizing our country, will not avoid showing that the financial system is holding up without the need for additional stimulus packages or tax increases.
But according to other sources within the industry, what does not make sense is giving a lender a failing grade if it has enough financial instruments and proprietary holdings to face an adverse situation without having to ask for aid. For that reason, it´s assumed that all the banks and practically all of the cajas will pass the most demanding stress tests.
