European Economy: Europe moves away from Wall Street Pressure - ECB's bank stress test results set for 26 October

The results of Europe's most comprehensive review of banks' health will be released on October 26, the European Central Bank and the European Banking Authority said today.

The test results will give the clearest picture yet of the state of the European banking sector.

The ECB hopes the tests will banish fears about the health of European banks, which were hit hard during the financial crisis, and restore investor trust and revive lending to euro zone households and companies.

This is key to getting economic recovery back on track.

While the ECB is putting the euro zone's 130 largest banks through a backward-looking asset quality review and forward-looking stress test, the EBA will also run stress tests on banks in Britain and some other non-euro countries.

UK banks face an additional test to their resilience to withstand a sharp drop in housing prices and the Bank of England said the result of this will be published on December 16.

The ECB has said lenders will have six months to cover any capital shortfalls reported in its asset quality review or the baseline stress test scenario, and nine months to cover any capital shortfalls from the adverse stress test scenario.

"Following the publication of the results, banks will, where necessary, have two weeks to submit capital plans to the ECB, detailing how shortfalls will be covered," the ECB said today.

It has imposed the rigorous tests to wipe the slate clean before it takes over as the bloc's banking supervisor in November - part of a broader push for European integration to avert future crises.

EU-Digest

Banking Industry: EU - You won’t believe this, but some big banks may have broken the law again – by Jason Karaian

Just as markets were digesting the Euro 1.9 billion (US $2.6 b) penalty imposed on Credit Suisse for helping American clients avoid taxes, news from Brussels suggests that yet another big fine is looming for a few other banking giants. 

Today the European Commission accused JPMorgan, HSBC, and Crédit Agricole with rigging euro interest rates, alleging that they acted in a cartel to manipulate Euribor, a key interbank lending rate.

The three banks refused to settle the antitrust case in December last year, when the commission fined eight other banks and brokers a record €1.7 billion ($2.3 billion) for their roles in the rate-rigging cartel. Settling the case saved the accused 10% of the headline fine, on top of other discounts based on their degree of co-operation with regulators.

JPMorgan, HSBC, and Crédit Agricole must now answer the commission’s charges without the offer of leniency that comes from settling. 

That said, throughout the financial crisis European regulators have been seen as softer than their American counterparts, with Brussels wielding more limited powers and showing less of an appetite to impose big penalties. Even after settling with the EU in last year’s euro interest rate case, Société Générale is challenging its €446 million fine in court, alleging “a manifest error of assessment” in calculating it.

The three banks that were charged today will hope to benefit from the eurocrats’ presumed timidity. In theory, EU cartel fines carry a penalty of up to 10% of a company’s global revenue, which would imply a combined fine of more than $18 billion, according to the bank’s latest annual results.

But the commission is highly unlikely to ask for this much in damages, and the depressing regularity with which big banks land in legal trouble these days means that they are well prepared to pay the penalties. From interest rate-rigging to mortgage mis-selling, tax avoidance, foreign-exchange manipulation, money laundering and much else besides, banks now operate under the constant threat of large fines, and they’ve built up enormous litigation reserves to cope. 

Note EU-Digest: one can only hope the EU Commission will not act with their usual
timidity in dealing with this serious fraudulent issues.

Read more: You won’t believe this, but some big banks may have broken the law again – Quartz

European Banking Sector: EU spent a third of its economic output on saving its banks between 2008 and 2011, using taxpayer cash

Europe failed to agree on how to share the cost of bank collapses on Saturday, as Germany resisted attempts by France to water down rules designed to spare taxpayers in future crises.

Almost 20 hours of talks late into the night could not forge a way for countries to set up an EU-wide regime that would first impose losses on shareholders and bondholders when a bank fails, followed by depositors with more than 100,000 euros ($132,000).

Ministers will make a fresh attempt to break the impasse at a meeting on Wednesday, on the eve of an EU leaders summit, and resolve one of the most difficult questions posed by Europe's banking crisis - how to shut failed banks without sowing panic or burdening taxpayers.

"I think we can reach a deal if we take a few more days," said Michel Barnier, the European commissioner in charge of regulation. "We are not far off now from a political agreement."

The European Union spent the equivalent of a third of its economic output on saving its banks between 2008 and 2011, using taxpayer cash but struggling to contain the crisis and - in the case of Ireland - almost bankrupting the country. 

Read more: Europe unable to break impasse on who pays when banks fail

European Banking Sector - German business sector backs universal banking system

Stable financial markets are of great importance for the German economy, as companies and citizens need strong financial partners and comprehensive financial services. As a consequence of the financial crisis, policymakers have taken numerous regulatory measures that are ultimately designed to make financial markets more stable and banks more risk-resilient and thus to ensure the reliable provision of financial services. In contrast, the introduction of dual banking systems does not help to reduce risk.

With this in mind, the German business and banking sectors advocate maintaining the universal banking system in Germany and the EU. The universal banking system has evolved together with the German economy and its specific structure based around its strongly international orientation and its backbone of small and medium-sized enterprises. Particularly in Germany, the house bank principle and universal banking go hand in hand and are a key condition for a broad and differentiated range of customer- oriented financial products and services; it is by no means only classical banking products such as loans, deposits and payments that are in demand in the business sector. Hedging and financing tools, which are usually associated with investment banking, also form an integral part of financial services for companies, in particular for the many importers and exporters. This is especially true for the German ”Mittelstand”.

The introduction of a dual banking system would compromise this established financing tradition, which was maintained during the financial crisis, for example by increasing the cost of hedging corporate currency or interest-rate risks and restricting the supply of such financial services. Policymakers in Germany should therefore take a highly critical view of any idea which aims to introduce elements of a dual banking system, for example those outlined in the proposals made by the High-Level Expert Group chaired by Finnish central bank president Erkki Liikanen, and express support for retaining the well- established universal banking system in Germany. Intervening in banks’ business models does not strengthen financial market stability but instead serves to impair the functionality of the German banking sector. Whilst the benefits of such an initiative are unclear, the resulting burdens would become immediately visible – a loss of international competitiveness for companies in Germany and a resulting threat to jobs.

Read more: German business sector backs universal banking system — Association of German Banks

Bankers bash each other in battle for the euro - by Paul Ames

Draghi vs. Weidmann doesn't have the same ring as Ali vs. Frazier or King Kong vs. Godzilla, but when it comes to the fate of the euro, it’s a battle between the two biggest beasts of European banking.

Mario Draghi, president of the European Central Bank, is poised next week to put flesh on the bones of his pledge to "do whatever it takes" to save the European currency.

He wants to empower the ECB to use its vast financial firepower to buy an unlimited number of bonds from high-debt countries that can no longer affordably raise money on the markets.

It's seen as an essential step to propping up the tottering finances of Spain and possibly Italy.

Read more: Bankers bash each other in battle for the euro | GlobalPost

Moody's downgrades five Dutch banks

Moody's Investors Service has downgraded five Dutch banks, four of them by two notches, and warned a Greek exit of the euro would see further cuts.
The move kicks off a long-awaited round of downgrades for major European institutions.

Moody's set a stable outlook to the ratings for four of the groups but kept a negative outlook for ING Bank, meaning it could cut it again.

The downgrades will only add to pressure on European leaders to sort out the region's debt crisis, with a real test to the union coming this weekend as Greeks go to the polls. Moody's also warned that, were Greece to exit the euro, further ratings actions on European banks could well be needed.

The long-expected news had little immediate impact on financial markets in Asia, with the euro holding firm around $1.2616.  "Today's actions reflect Moody's view that Dutch banks will face difficult operating conditions throughout 2012 and possibly beyond," Moody's said in a statement.

Moody's agency said it had cut the ratings by two notches to Aa2 for Rabobank Nederland, to A2 for ING and ABN Amro, and to Baa2 for LeasePlan Corporation.

EU-Digest

Euro zone agrees to lend Spain up to euro 100 billion

Euro zone finance ministers have agreed to lend Spain up to 100 billion euros ($162 billion) to save its stricken banks and try to avert a broader financial catastrophe.

Fellow finance ministers in the 17-nation euro zone accepted a plea from Spain in a statement released after a conference call lasting around two and a half hours.

The Eurogroup and Madrid said the amount of the bailout would be sufficiently large to banish any doubts.

For more: Euro zone agrees to lend Spain up to $162b | BUSINESS News

German parties strike deal on financial market tax

The German government and the main opposition parties have agreed on the principles of a tax on financial market transactions. The deal is essential for German parliamentary approval of the EU fiscal compact. 

The accord has been thrashed out in a joint working group made up of the conservative-led centre-right government and the opposition Social Democratic Party (SPD) as well as the Green Party.

According to SPD chairman Sigmar Gabriel, the compromise was based on an EU Commission proposal for a financial transaction tax, and marked a complete "180 degrees" U-turn in the position of the government.

"The agreement is a first big step towards overcoming the eurozone debt crisis," Gabriel told reporters in Berlin on Thursday.

Read more German parties strike deal on financial market tax | Business | DW.DE | 07.06.2012

Europe Moves Closer to Banktatorship

The present crisis, which is largely the result of excessive credit expansion and poor risk management by EU banks, is being used by the European Commission and the ECB to establish a euro-wide ”banking union” and to impose savage cuts to social programs, health care, and pensions.  The response by EU policymakers is a social counterrevolution designed to transform the 17-member monetary union into a permanent ”austerity zone” ruled by corporate elites and big finance. 

The eurozone’s permanent bailout fund, the ESM, has not yet been ratified by all 17 members and already the European Commission wants to change its mandate to include direct bailouts to banks.   The direct funding of underwater banks is a blatant power-grab, an attempt to establish the primacy of banks in the same way that the TARP was used to create Too Big To Fail in the US. TBTF means that the banks have merged with the state and that taxpayers provide blanket guarantees for  their survival. Europe is moving fast towards this same model.

Read more: Europe Moves Closer to Banktatorship » Counterpunch: Tells the Facts, Names the Names

Europe Stocks Rise As Borrowing Costs Fall

European shares closed higher on Thursday, boosted by euro zone banks as newly available cheap cash from the European Central Bank helped some sovereign bond yields fall and further allayed default risks among corporates.

Euro zone banks rose 2.6% after France's and Spain's borrowing costs fell at auctions on Thursday and yields on Italian notes dropped on the secondary market.

Italian banks, which own the lion's share of the country's debt, led gainers, with Banco Popolare rising 10.5% and UniCredit up 5.8%, helping Milan's FTSE MIB index outpace its peers to close 2.9% higher. Italian lenders took a quarter of all the money available at the ECB


For more: Europe Stocks Rise As Borrowing Costs Fall - Investors.com

EU Van Rompuy: S-Term Bank Recap Needed In Current Circumstances

The following statement was issued by the EU President Mr. Van Rompuy at the EU Summit in Frankfort Germany:

"At today's meeting, I informed the members of the European Council about the state of preparations of the Euro Summit that will take place later in the day. We discussed the situation and all leaders underlined their common resolve to do their utmost to overcome the crisis and to help face in a spirit of solidarity the challenges confronting the European Union and the Euro area.

The members of the European Council welcomed the consensus on measures to restore confidence in the banking sector reached by the Council (ECOFIN) on 22 October. The banking measures form part of a broader package, alongside the decisions to be taken by today's meeting of the Euro Summit, and are subject to its full approval. The Council (ECOFIN) will finalise the work and adopt the necessary follow up measures. The consensus concerns both the banks' short-term and longer-term needs. The overarching goal of the exercise is to foster confidence in the European banking sector.

Improved access of the banks' medium- and long-term funding is essential to avoid a credit crunch and to safeguard the flow of credit to the real economy. States will provide guarantees enabling banks to raise term funds. We decided to rely on a truly coordinated approach at EU level regarding the conditions and criteria.

Short term recapitalisation is needed in the current exceptional circumstances to create a temporary buffer allowing the banking system to withstand shocks in a reliable manner. Agreement has been reached that banks should be required, by 30 June 2012, to have 9 % of the highest quality capital. This figure should take into account a marking down for sovereign bond holdings against current market prices (as of 30 September 2011). Banks should raise capital in the first place from private sources, and only if that is not possible, seek support from national governments. If the latter support is not available without creating systemic risks for the Eurozone, the EFSF should provide the loans for recapitalisation.

Any form of public support, whether at a national or EU-level, will have to comply to the rules of the state aid crisis framework. The Commission has indicated it will be applied with the necessary proportionality in view of the systemic character of the crisis. With these measures, we restore confidence and put Europe's banking sector on a sound footing."

For more: EU Van Rompuy: S-Term Bank Recap Needed In Currnt Circumstnces | mninews.deutsche-boerse.com