Up to 15 EU banks to fail stress test: sources

FRANKFURT/BRUSSELS (Reuters) – Up to one in six European banks is set to fail an EU-wide financial health check, according to euro zone sources close to the stress-testing, as officials scramble to set up backstops for those at risk.

The result, which the European Central Bank (ECB) and others hope will persuade investors that the EU is finally coming clean about the extent of its banks’ problems, will put pressure on reluctant states to prop up lenders if they cannot raise money themselves.

Euro zone sources said the European Banking Authority is set to announce within weeks that between 10 and 15 of the 91 banks being scrutinized in the tests had failed, with casualties expected in Greece, Germany, Portugal and Spain.

The checks will provide the first picture of the health of the region’s banks since a previous round a year ago was deemed too lax. In that round, Ireland’s banks were all given a clean bill of health — just months before their difficulties drove the country to seek an international bailout.

The new checks will measure how well the core capital that banks rely on to absorb losses such as unpaid loans holds up when exposed to an economic dip or fall in property prices.

They also gauge the impact on banks should the bonds they own issued by states such as Greece lose value. But the tests stop short of assessing the full impact of a country default including the likely resultant freeze in interbank lending.

In the drive for credibility, the European Banking Authority (EBA), which runs the tests and the ECB, which sets the macro economic scenarios, are pushing for more banks to fail than last year’s seven.

“How many do we expect to fail? I would say 10 to 15,” said one senior euro zone central banking source.

The EBA wants the number of banks that do not pass the tests to be around that level to show the examinations are serious, said a second source, adding that the authority did not want to push for more, for fear it could spark panic and intensify the euro zone’s debt crisis.

“In order to demonstrate that it is credible, the EBA would need to show that the number of bank failures is significant, without being substantial,” said the source. “A number in the teens is about right.”

A spokeswoman for the EBA said testing was still under way and declined to comment on what she called speculation about the outcome.

TECHNICAL AND POLITICAL

The tests are technical, as well as political. While the EBA and ECB want to show up the failures, national regulators want to stop their banks appearing on the list, concerned they would look incompetent for having failed to spot such problems themselves.

EU authorities want to expose failures around the EU, said the second source, avoiding too many problems in weak countries, such as Spain, as that could prompt international lenders to shun the country and its banks.

“They are going to find a way of preventing one center … from sticking out,” said the source. “If it were to be Spain, it would be very bad news. Failing German banks in a stress tests would be much safer.”

The EBA, which is due to announce the results in mid-July to coincide with a meeting of EU finance ministers, also faces pressure from governments wanting to avoid failures that may force them to come up with financial support.

A dispute with Germany for failing to apply the stress-test criteria as strictly as it should recently delayed the conclusion of the stress tests by some weeks, said one EU official.

“Every national regulator will be fighting for none of their banks to be on the list,” said the source. “It’s a mark of incompetence. It’s a reputational issue and it’s an issue of money.”

High-level officials from European finance ministries are now working on how to help those given a failing grade.

Andrea Enria, head of the EBA, called on governments last week to put plans in place to help banks that fail or are shown to be vulnerable.

On Tuesday, a spokeswoman for the EBA emphasized that governments must not be slow to plug any capital holes exposed in the checks.

“It is important that concrete and decisive actions by the banks and authorities are taken following the results, including ensuring that credible capital plans … are taken to address deficiencies.”

Although the EBA is insisting on the publication of each bank’s sovereign debt holdings by maturity as well as size, it is ultimately the number of banks to fail that will establish the credibility of the checks.

“If it was the same as last time — when seven failed, next to nothing — then no one would believe it,” said one source. “But you cannot fail 50, or the banking system would collapse.” http://ca.finance.yahoo.com/news/Exclusive-Up-15-EU-banks-fail-reuters-2798350039.html

Canada’s inflation leaps most in 8 years

Financial Post Staff OTTAWA — Consumer prices were up 3.7% in May from a year earlier, the biggest leap since March 2003, Statistics Canada said Wednesday.

Economists polled by Bloomberg expected 3.3% annual inflation in May.

Gasoline prices were cited for the main reason for such a high inflation rate last month.

The core inflation rate, which factors out volatile items such as energy and certain foods, was 1.8%. Economists anticipated 1.5%.

The Canadian dollar firmed to a session high of $1.0280 after the data was released.

More to come … http://business.financialpost.com/2011/06/29/canadas-inflation-jumps/

Are we headed for rapid rate rises?

Bloomberg News      Central banks need to start raising interest rates to control inflation and may have to act faster than in the past, the Bank for International Settlements said.

“Tighter global monetary policy is needed in order to contain inflation pressures and ward off financial stability risks,” the BIS said in its annual report published Sunday in Basel, Switzerland. “Central banks may have to be prepared to raise policy rates at a faster pace than in previous tightening episodes.”

While policy makers in Asia and Latin America are already raising borrowing costs to damp price pressures, rates remain near record lows in the world’s largest developed economies. Central banks in the U.S., U.K. and Japan have signalled they intend to keep that stimulus in place for some time, with only the European Central Bank moving to gradually tighten credit as inflation risks increase.

“Global inflation pressures are rising rapidly as commodity prices soar and as the global recovery runs into capacity constraints,” said the BIS, which acts as a central bank for the world’s central banks. “These increased upside risks to inflation call for higher policy rates.”

With U.K. inflation running at 4.5%, more than double the Bank of England’s target, the BIS said “one wonders how long its current policy can be sustained.” The pound rose half a cent in early European trading to $1.5985 before retracing to $1.5931 at 9 a.m. in London.

Crude oil prices have gained 20% in the last 12 months, putting pressure on companies to increase wages and pass on higher costs to consumers.

“The price pressure is there,” said Carsten Brzeski, chief European economist at ING Group NV in Brussels. “One of the lessons of the financial crisis is that you shouldn’t leave rates too low for too long. Now is the time to remember that lesson.”

BIS General Manager Jaime Caruana said global headline inflation has risen a percentage point to 3.6% since April 2010. At the same time, short-term interest rates adjusted for inflation “have actually fallen in the past year, from minus 0.6% to minus 1.3% globally,” he said in a speech in Basel Sunday.

“The world economy is growing at a historically respectable rate of around 4%,” Caruana said. “The resurgence of demand has put concerns about deflation behind us. Accordingly, the need for continued extraordinary monetary accommodation has faded.”

The ECB in April raised its benchmark interest rate from a record low of 1% and has signalled another quarter-point step is likely in July.

By contrast, the Federal Reserve last week repeated a pledge to keep its policy rate close to zero for an “extended period,” while the Bank of Japan this month held its benchmark near zero and kept credit and asset-purchase programs in place.

Minutes of the Bank of England’s last policy meeting this month, at which the key rate was held at 0.5%, show some officials see the potential to extend bond purchases to boost a faltering recovery.

The BIS said that in “some advanced economies” policy tightening still needs to be balanced against the “vulnerabilities” associated with balance-sheet adjustment and financial sector fragility.

Still, “undue delay in the normalization of the monetary policy stance entails the risk of creating serious financial- market distortions,” it said. Furthermore, a “timely tightening” of policy in both emerging-market and advanced economies will be needed “to preserve a low-inflation environment globally and reinforce central banks’ inflation- fighting credibility.”

The BIS said central banks should reduce the size of their balance sheets, though it would be “dangerous” to cut them “too rapidly or too indiscriminately.”

In response to the financial crisis, the Fed and the Bank of England “sharply” increased their total assets from about 8% of gross domestic product to just below 20%, while the ECB expanded its assets from 13% of GDP to more than 20%, according to the BIS.

“Balance-sheet policies have supported the global economy through a very difficult crisis,” it said. “However, the balance sheets are now exposed to greater risks — namely interest-rate risk, exchange-rate risk and credit risk — that could lead to financial losses.”

The BIS also urged governments to pursue fiscal consolidation, saying the biggest risk is “doing too little too late rather than doing too much too soon.” In Europe, policy makers must fix the region’s debt crisis “once and for all,” it said.

“Nowhere is the link between fiscal sustainability and financial health more apparent than in parts of Europe today,” Caruana said. “There is no easy way out, no shortcut, no painless solution.”

The BIS warned that a failure of the U.S. to tackle its budget deficit could become a source of instability, with potentially “far-reaching ramifications for the global economy” should a rapid depreciation of the dollar result.

“The current ability of the United States to easily finance its deficit cannot be taken for granted,” the report said.

The BIS holds currency reserves on behalf of its members and provides policy makers with a forum for discussion. Attendees at the annual general meeting in Basel Sunday included ECB President Jean-Claude Trichet, Fed Chairman Ben S. Bernanke, Bank of Japan Governor Masaaki Shirakawa and Bundesbank President Jens Weidmann. http://business.financialpost.com/2011/06/27/central-banks-need-to-raise-rates-%E2%80%94-and-quickly-bis/

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