Posts Tagged ‘stress tests’

Congressional Oversight Panel Takes on the Foreclosure Mess

Wednesday, December 8th, 2010

Congressional Oversight Panel Takes on the Foreclosure MessSloppy foreclosure paperwork could upset the nation’s housing market and destabilize the economy in general,  according to a report released by the Congressional Oversight Panel.  This group oversees the government bailout and its statement marks the first time a federal watchdog has issued an opinion on the foreclosure issue.  Consumer advocates and financial analysts had previously raised the issue, noting that although the consequences of the foreclosure mess are unclear.  The situation has the potential to impact mortgages that are not in trouble but were securitized and sold to investors.

“Everyone’s very nervous about what’s going to happen,” said an anonymous industry source.  “We have all hands on deck.”  Some lawmakers want to revisit legislation that would allow bankruptcy judges to order lenders to reduce the principal the homeowner owes.  Others favor allowing big banks to spin off their mortgage-servicing operations to avoid conflicts of interest.  “The risk is small that a bill gets through, but we are taking it very seriously,” said another unidentified financial lobbyist.  The dilemma became apparent in recent months as Ally Financial, Bank of America and JPMorgan Chase halted foreclosures as it became clear that many were based on flawed documentation.

The oversight panel also voiced concerns that investors who bought the securitized mortgages could file lawsuits that ultimately might cost banks billions of dollars.  At the same time, the panel said the Treasury Department’s claims that the mortgage situation poses slight systemic risk to the financial system are premature.  “Clear and uncontested property rights are the foundation of the housing market.  If those rights fall into question, that foundation could collapse,” according to the report, which also recommended that the Treasury and Federal Reserve conduct new stress tests on Wall Street banks to gauge their ability to cope with any new upheavals.

European Bank Stress Tests Demonstrate Systemic Weakness

Wednesday, August 11th, 2010

European bank stress tests wee like a day at the beach.  There’s good news and bad news about the health of European banks.  Of the 91 financial institutions that recently underwent stress tests, only seven outright failed. Those seven who did not perform well were ordered to raise their capital by €3.5 billion (approximately $4.5 billion).  The number of failures were far less than what was expected, though the results confirmed fears that the stress test was too easy.

The results indicate that 91 banks in 21 European nations would be able to cope with a second recession, even though investor confidence has been shaken by the Greek debt crisis.  “I see nothing stressful about this test.  It’s like sending the banks away for a weekend of R&R,” said Stephen Pope, chief global equity strategist at Cantor Fitzgerald.  “There is little evidence that the tests have been applied consistently and there is a distinct lack of credibility, making it a wasted opportunity,” said Richard Cranfield of the international law firm Allen & Overy.  Even though the modest findings cast doubt on how credible the bank tests were, it may not matter because the European economy is recovering quickly.

Five small regional Spanish lenders who failed the test will require recapitalization that will accomplish a state-funded drive to unite the nation’s network of unlisted savings banks.  They included the Banca Civica, Diada, Espiga, Unnim and Cajasur.  All told, these small banks need €1.8 billion, according to the Bank of Spain.  Several German and Greek banks also were perceived as weak and in need of restructuring, although the state-owned Hypo Real Estate was the only German lender to flunk, as was the Greek owned ATEbank.  Banks that nearly failed with a Tier 1 ratio of less than seven percent under the most stressed scenario included Germany’s Deutsche Postbank, Greece’s Piraeus, Allied Irish Banks, Italy’s Banca and Spain’s Bankinter.  According to Cranfield, “The banks that have scraped through may have more of a challenge on their hands and they may be the ones the market focuses on,” Cranfield concluded.

Local Banks Facing Significant CRE Losses

Monday, June 15th, 2009

Toxic commercial real estate loans could create losses up to $100 billion for small and mid-size banks by the end of 2010 if the economy worsens.  According to a Wall Street Journal report – which applied the same criteria used by the federal government in its stress tests of 19 big banks — these institutions stand to lose up to $200 billion.  In that worst-case scenario, 600 small and mid-sized excedrin1banks could see their capital contract to levels that federal regulators consider troubling, possibly even surpassing revenues.  These losses would exceed home loan losses, which total approximately $49 billion.

The Journal, which based its analysis on data mined from banks’ filings with the Federal Reserve, are a grim reminder that the banking industry’s troubles are not confined to the 19 giants that have already completed the Treasury Department’s stress tests.  More than 8,000 lenders nationwide are feeling the dual impacts of the recession and commercial real estate slowdown.

The banks analyzed by the Journal include 940 bank-holding companies that filed financial statements with the Fed for the year ending December 31.  They range from large regional banks to mom-and-pop banks in small towns, as well as American-based subsidiaries of international banks.

Smaller banks are unlikely to appeal to bargain-hunting investors who are starting to recapitalize the industry’s giants.  As a result, these institutions must boost their capital by selling assets and making fewer loans – which could make the recession last even longer than anticipated.