Financial crash probability has receded
Posted on 29. juil, 2010 by Jean Jacques Ohana in Weekly Focus | Commentaires fermés
Banks stress tests have proved to be a non event. Everyone knew the results in advance: overall the solidity of the banking sector has been supposedly established and only seven banks out of 91 failed the exam. The stress tests were not too stringent as sovereign bonds held to maturity have been excluded from the tests since « no sovereign bonds defaults » will occur according to the Committee of European Banking Supervisors (CEBS). Meanwhile, sovereign stress scenarios have been applied to traded bonds only. Lenders hold about 90 percent of their Greek government bonds in their banking book and 10 percent in their trading book, according to a survey by Morgan Stanley.
Besides, the Basel Committee softened banking capital rules: minority interests will be included in required shareholder capital and last but not least, liquidity requirements on cash securities to cover short term funding have been lightened, constraint on leverage ratio will be reported to Hellenic Calendars (i.e. as of 2018!). The banking lobby has worked pretty well and markets have been pleased with complacency from European politics and banking authorities.
In both regards of risk aversion and stocks markets trends, the dynamic has significantly improved.
Risk aversion has come in negative territory and the red spot light of G10 sovereign debt and the banking sector have evolved positively.
Overall, Riskelia’s estimated probability crash has receded thanks to a decrease in risk aversion as demonstrated in the chart below. This positive development may last long enough to sustain a rally on equities but the sovereign solvency sword of damocles is still looming.
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