EUROPEAN lenders’ credit default swap (CDS) spreads narrowed and the euro was steady yesterday as the market gave a mild thumbs-up to the region’s bank stress test results.
The cost of insuring against default on debt issued by key banks fell after the Committee of European Banking Supervisors (CEBS) said just seven of 91 institutions needed to raise extra capital. The amount of capital required – €3.5bn (£2.9bn) – was far below the level predicted by analysts.
CDS spreads for Barclays, HSBC, Lloyds Banking Group and Royal Bank of Scotland fell by between one and 12 basis points, according to Markit. Spreads for Spain’s regional banks, where instability has long been suspected, shrank more dramatically as investors drew confidence.
The premium for insuring Caja de Ahorros del Mediterraneo’s debt dropped from 633 to 588 basis points. The steepest decline for a European bank saw National Bank of Greece’s CDS spread come in from 831 basis points to 750 basis points.
The euro closed slightly up against the dollar at $1.2996. The pound was marginally higher at $1.5497.
Analysts were divided on the usefulness of the stress tests. At the positive end of the spectrum, Nomura Credit suggested the extent of institutions’ disclosure would bolster market sentiment and allow investors to model more bearish scenarios.
Bank of America Merrill Lynch said greater transparency on banks’ sovereign debt holdings was “certainly the most significant accomplishment”.
Others were scathing. Analysts at RBS European Economics said the decision not to factor in banks’ sovereign exposure outside their trading books and use a tier one capital ratio target rather than core tier one capital meant the tests were “weakened”.
Beyond the market’s short-term reaction, the arbiter of the tests’ success will be whether the blockage in wholesale lending is eased, said Exane BNP Paribas’ Ian Gordon. He said: “[That] would be of clear benefit to wholesale-reliant UK banks.”
Jean-Claude Juncker, chairman of the Eurogroup of finance ministers, defended the stress tests against criticism. He insisted they had been “robust” and “professional”.