Economix: What Is Capital?

The European bank stress test results are out, and we are told that all but eight — or is it nine? — banks passed.

FLOYD NORRIS

Notions on high and low finance.

There is a lot of talk about how stressful the tests really were. Are they not treating sovereign debt as being as risky as markets now believe it to be? That is interesting, but may not be very enlightening. We can take for granted that most or maybe all banks in any country would be in trouble if that country defaulted on its debts. It appears that we now will know more than ever before about the specific exposures of each bank.

You can check out the numbers for any particular bank here.

The tests covered 91 banks, but the European Banking Authority, which conducted the exercise, is releasing results for just 90 of them. The other one is Helaba, a German bank owned by two states. It told the agency that it could not release its results. (There is an interesting commentary on power. The bank can order the European agency to keep its opinion quiet.)

Helaba Landesbank Hessen-Thüringen, to use the full name, has posted its own stress tests results, which show it is in fine condition.

The dispute is over what counts as capital. Helaba is outraged that the E.B.A. will not count “hardened silent participations” as core capital. And what is that? As near as I can tell, it amounts to promises by the two states that own the bank that the states will put up more money if needed.

Spanish banks that failed also are complaining about the definition of capital. They want “generic provisions” to count. Apparently that is reserves put aside to cover losses not yet identified.

In each case, previous stress tests counted the disputed capital.

The fact that these arguments are going on does provide some evidence that the stress tests are more credible than previous ones. They also remind us that one of the games that banks have played in the past — often with support from bank regulators — has been to count some pretty dubious things as capital. When the crisis hit, a lot of that “capital” turned out to not be of much use.

Article source: http://feeds.nytimes.com/click.phdo?i=030a7c2f11dff1f594d96bb04a14241d