The results of the stress test were of course better than thought relative to the amount of banks ‘failing’ and the amount of total capital that needs to be raised in order to get every one of the 91 to a 6%+ tier one capital ratio. We can all debate whether the test was helpful or not since so many ‘passed’, whether sovereign debt was in the trading book or the banking book, etc… but the bottom line is the test was not truly stressed to the real worst case scenario, a sovereign default. If you’re in the camp that there is no way Greece defaults, then the results of the test can provide you with much clarity. If you’re in the camp that Greece will inevitably default and time is the only question, the stress tests have no meaning because all bets are off under a sovereign debt restructuring due to the huge sovereign debt cross holdings of a majority of the banks tested.
European banks/Sovereign default
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