{"id":15717,"date":"2011-07-15T22:56:59","date_gmt":"2011-07-16T02:56:59","guid":{"rendered":"http:\/\/www.prefblog.com\/?p=15717"},"modified":"2011-07-15T22:56:59","modified_gmt":"2011-07-16T02:56:59","slug":"july-15-2011","status":"publish","type":"post","link":"https:\/\/prefblog.com\/?p=15717","title":{"rendered":"July 15, 2011"},"content":{"rendered":"

Eight European banks failed their stress test<\/a>:<\/p>\n

Eight banks failed the European Union stress tests after regulators said they had a combined capital shortfall of 2.5 billion euros ($3.5 billion).<\/p>\n

The banks were found to have insufficient reserves to maintain a core tier 1 capital ratio of 5 percent in the event of an economic slowdown, the European Banking Authority said.<\/p>\n

The assessments are the first by the European Banking Authority since it was set up earlier this year. Last year\u2019s tests by its predecessor were criticized for not being tough enough because banks were shown to need only 3.5 billion euros more capital, a 10th of the lowest analyst estimate. Banks that fail the stress test must present a plan to raise more capital within three months.
…<\/b>
Rating company Standard & Poor\u2019s own stress test, published in March, found European banks would need as much as 250 billion euros in fresh capital if faced with a \u201csharp\u201d increase in yields and a \u201csevere\u201d economic downturn. In contrast, a survey of 113 investors by Goldman Sachs Group Inc. (GS) last month showed they expect banks to raise 29 billion euros after the tests.<\/p><\/blockquote>\n

It is not clear just how stressful the tests were – the last batch involved a rise in government yields, but no defaults – which was a rosy projection even at the time.<\/p>\n

This test included what are referred to as write-downs on EU government bonds<\/a>:<\/p>\n

European Union regulators\u2019 stress tests on the region\u2019s banks include a 25 percent writedown on Greek government bonds. The market has already driven down the price of 10-year Greek debt to 52 cents on the euro.<\/p>\n

Regulators didn\u2019t include the possibility of a sovereign default in the tests even though credit-default swaps indicate about an 87 percent chance that Greece won\u2019t be able to repay its debts. The tests included a 22.3 percent writedown on Portuguese 10-year securities, while they currently trade at 54 cents per euro.<\/p>\n

\u201cCurrent market expectations regarding sovereign risk are not incorporated in the tests,\u201d Hank Calenti, a bank strategist at Societe Generale (GLE) SA in London, wrote in a note to clients today.<\/p><\/blockquote>\n

… but it is not clear to me whether these were actually write-downs, or merely market value adjustments (which affect the trading book but not the banking book). Last time ’round, the test included only a temporary decline in the market value of government debt, not a permanent impairment.<\/p>\n

There is more discussion from the Peterson Institute<\/a>:<\/p>\n

Second, and perhaps more importantly given the importance of \u201ctail-end events\u201d for bank stress tests, it remains unclear what the \u201csovereign risk shock\u201d will entail in terms of assumed haircuts for sovereign bonds. Here it is clear that the stress test focus on \u201ca shock on [government bond] interest rates\u201d in its sovereign component is a clever way to avoid explicitly stating the politically explosive number for just how large a haircut on sovereign bonds banks should be expected in the EU \u201cadverse scenario.\u201d On the other hand, as anyone can calculate the \u201cimplied bond haircut\u201d from the assumed increase in the interest rate, the avoidance of any explicit reference to a default is clearly a political exercise.
…<\/b>
Several \u201cpress leaks\u201d suggest that differentiated haircuts are being assumed in the EU stress tests, with some reports stating that Greek bonds will suffer a 17 percent haircut and Spanish bonds 3 percent. Other reports suggest that the implied Greek haircut could be 20 percent, 8 percent for Spanish bonds and 5 percent for Portugal.<\/p><\/blockquote>\n

C-EBS states<\/a> merely:<\/p>\n

The exercise also envisages adverse conditions in financial markets and a shock on interest rates to capture an increase in risk premia linked to a deterioration in the EU government bond markets.<\/p><\/blockquote>\n

… which is not the same thing as a default. This is more than just a little disingenuous. There is more than one dimension of risk in bonds, and recent prices are clearly a reflection of credit, not interest-rates.<\/p>\n

So the Europeans will do what they do best<\/a>:<\/p>\n

Eurozone leaders will meet in Brussels on July 21 to discuss a second bailout package for Greece and the financial stability of the euro area, European Council President Herman Van Rompuy said on Friday.<\/p>\n

The summit, which will start at 1000 GMT, could prove a critical moment in determining what role private sector creditors play in further aid to Greece, and how EU leaders will stem the threat of debt contagion to Italy and Spain.<\/p>\n

\u201cOur agenda will be the financial stability of the euro area as a whole and the future financing of the Greek program,\u201d Van Rompuy said in a statement posted on Twitter.<\/p>\n

\u201cI have asked the preparatory work to be brought forward inter alia by the finance ministries,\u201d he said, indicating that senior finance officials would meet ahead of time, probably on Wednesday July 21, to agree the agenda.<\/p><\/blockquote>\n

There’s an ownership change for Betapro<\/a>:<\/p>\n

Jovian Capital Corp. announced Friday it will sell its stake in exchange traded funds business BetaPro Management Inc. to a South Korean firm, confirming plans hinted at last week.<\/p>\n

Seoul-based Mirae Asset Global Investments Co. will acquire Jovian\u2019s approximately 58% interest in the ETF business, among other things, based on an enterprise value of about $150-million. Jovian\u2019s portion of the purchase price is expected to be about $90-million.
…<\/b>
The Mirae deal includes: Jovian\u2019s interest in BetaPro; AlphaPro Management Inc. (a subsidiary of BetaPro); BetaPro\u2019s 40% interest in BetaShares Holdings Pty. Ltd. (the parent company of an Australian ETF company); Jovian\u2019s wholly owned subsidiary Horizons Exchange Traded Funds Inc.; and Jovian\u2019s wholly owned subsidiary JovInvestment Management Inc.<\/p>\n

Jovian\u2019s interest in ETF manager Hahn Investment Stewards & Co. Inc. is not part of the deal.<\/p><\/blockquote>\n

The amazing thing about this business is that you only have to make one good, well-publicized market forecast to be set up for life (if they’re not well publicized, you just talk about it all the time; then it will be well-publicized to your clients). The latest example is Meredith Whitney<\/a>:<\/p>\n

Time is running out on the credibility of Meredith Whitney, who has yet to acknowledge that her eight-month-old prediction of widespread defaults this year in the market for state and local government debt is proving unfounded.<\/p>\n

Defaults fell 60 percent in the first half of 2011 compared with the same period last year, including a $12.5 million Austin, Texas, apartment project that made a late payment in June, according to Distressed Debt Securities Newsletter.<\/p>\n

Whitney, the analyst who rose to prominence by predicting Citigroup Inc.\u2019s 2008 dividend cut, predicted \u201chundreds of billions of dollars\u201d of municipal defaults within 12 months in a Dec. 19 \u201c60 Minutes\u201d broadcast, fueling a wave of selling in the $2.9 trillion market. Instead, the number has fallen as cities slashed spending to balance budgets and state lawmakers stepped in to guard against insolvency and local bankruptcies.
…<\/b>
Whitney, 41, who started New York-based Meredith Whitney Advisory Group LLC in 2009 after leaving Oppenheimer & Co., predicted 50 to 100 \u201csizable\u201d municipal defaults as states slashed spending, in the interview with CBS Corp.\u2019s \u201c60 Minutes.\u201d As for timing, she said it would be \u201csomething to worry about within the next 12 months.\u201d<\/p>\n

\u201cThere\u2019s absolutely nothing about our thesis that has changed,\u201d she said on July 12 in an interview with Tom Keene on Bloomberg Radio\u2019s \u201cBloomberg Surveillance\u201d show in New York. \u201cThere are not enough revenues to go around and service all of the debt obligations or debt commitments outstanding.\u201d<\/p>\n

Whitney also sought to amend her prediction in the radio interview, saying that she said in December \u201cyou\u2019d start to see defaults within 12 months.\u201d She didn\u2019t respond to telephone calls and e-mails seeking additional comment.<\/p><\/blockquote>\n

DBRS confirmed RBC<\/a>:<\/p>\n

The Bank\u2019s ratings are underpinned by its highly diversified business model. This is reflected in its resilient performance, generating average annual ROE of 17.6% since 1994 and a minimum annual ROE over this same period of 11.9% (2009). RBC\u2019s diversified model consists of a superior domestic franchise, growing international businesses (wealth management and capital markets) plus solid credit and financial risk profiles.
…<\/b>
The Bank\u2019s operations are divided into six segments: Canadian Banking, Wealth Management, Insurance, International Banking, Capital Markets and Corporate Support, which represented 51%, 13%, 6%, minus 2%, 32% and minus 1% of pre-tax earnings in H1 2011, respectively.<\/p><\/blockquote>\n

CIBC has bought a 41% interest in American Century Investments<\/a>:<\/p>\n

CIBC (TSX: CM) (NYSE: CM) announced today that it will acquire a 41% equity interest in American Century Investments, a major U.S. asset management company with US$112 billion under management and a track record of solid earnings and strong investment performance. Total consideration is US$848 million. The 100% cash transaction will be immediately accretive and CIBC’s share of American Century earnings is expected to contribute approximately 15 cents per share of earnings in 2012 on a cash basis.<\/p>\n

CIBC is purchasing the minority interest held by JP Morgan Chase & Co. pursuant to a shareholder agreement using a pre-determined valuation methodology conducted by an independent third party.<\/p><\/blockquote>\n

According to the investor presentation<\/a>, American Century is:<\/p>\n

\n