In July, Irish banks – without exception – passed the “stress tests” imposed upon them by European governments and regulators. A mere four months later, these very same banks have brought the Irish Republic to its knees; and a report overnight from Reuters quotes the head of its central bank: “as far as [the Irish government] is concerned, they’re [all] up for sale.”
1. Is it possible that the European (and, by implication, American, Australian, et al.) “stress tests” were and are utterly bogus, and thus can't and won’t prevent “sound” banks from hitting the wall? Today, Bank of Ireland claims a core Tier 1 ratio of about 8% (as, indeed, did Washington Mutual on the day it shut its doors), yet the market refuses to lend to it. Greek, Portuguese and some Spanish banks (Spain’s biggest, Santander, boasts a Tier 1 cap ratio of ca. 8.5%) have similarly found themselves shut out of private-sector funding markets.
2. Is it possible that Basle III (never mind I and II) are pointless irrelevancies that can't and won’t shield banks from failure? During the past several years, Australian banks have passed three “stress tests” conducted by APRA, and all presently boast (quite literally!) Tier 1 cap ratios of ca. 8-9%.
3. If (from the point of view of soundness) passing a stress test means nothing, and if Tier 1 cap ratios mean nothing, then can somebody please explain to me why Australian banks are allegedly invulnerable? (Note: invocation of the phrases “Wayne Swan/RBA/Treasury vehemently insist they’re sound” and “S&P says they’re sound” doesn’t count as evidence.)
Listen to Leithner's interview with Steve Austin about the above here.