European Bank Kabuki Preview: Spoiler alert!

European banks are bracing themselves for another slap on the wrist and stern language, as the next round of sham “stress tests” begins.   We’re not quite sure who exactly is stressed, but our inkling is that it should be the taxpayers.  Thankfully, the ECB is hoping to avoid actually penalizing any banks by “prepping” them for the test.

Here’s what we know:

As executives from 128 banks meet inFrankfurt this week with some of the officials examining them, managers of the ECB’s Comprehensive Assessment are working out a mid-October date for final disclosure and prepping lenders for a conclusive stress test. Meanwhile institutions including Erste Group Bank AG (EBS) are stepping up efforts to take the sting out of the outcome by acknowledging losses and raising fresh capital.

Aiming to create a clean sheet for the region’s wounded lenders and foster credit to the economy, the ECB is urging them not to wait until the results of its health check are out. As its Asset Quality Review comes to an end this month, a round of quarterly earnings should boost the 104 billion euros ($141 billion) worth of measures cited by the ECB as already taken by banks to strengthen balance sheets.

Let’s ask a more fundamental question:   What’s the goal of these stress tests?

What’s the goal of these stress tests?

Is the goal of the ECB stress tests to:

  • (A) Is the goal to purge systemically dangerous institutions?
  • (B) Is the goal to create an image of stability?
  • (C) Is the goal to justify the gift of 1 trillion euros to the banks as reward for irresponsibility?

We’ll give you a hint:  The answer is definitely not (A).

In the past, the goal was unquestionably (B) to create an image of stability.  But this is the year isn’t like prior years:  This is the year that Mario Draghi is planning his epic bailout.

Let’s talk about answer (A) for a minute:  If the goal were to actually ‘fix’ the problem of systemically dangerous institutions, then there must unquestionably be mechanisms for bank nationalization in place. There must be mechanisms for debt-to-equity cram-downs.  There must also be pre-defined legal implications for management who have not yet complied with the advisories from prior stress tests.  There must also be a published ‘expected failure rate’.

Anyone seen these things discussed by the talking heads on TV?   Yeah. Not so much.

As we all know, there are two courses of action that won’t work:  Awarding European banks  a clean bill-of-health is needless to say ‘unhelpful’.  Equally unhelpful would be awarding them all trillions in bailout dollars.   Both measures have been tried with banks both in the USA and Europe and neither has resulted in increased responsibility or healthier balance sheets.   We know conclusively that bailing out banks has one outcome and only one outcome:  Richer bankers.  But that’s exactly what the plan is.

With a trillion Euro already pledged, is anyone surprised?

With a trillion Euro already on deck, is anyone surprised?

Here’s what else we know:  Mario Draghi is already underway with his 1 trillion Euro bailout for Europe’s banks, well-prior to the next round of kabuki tests.   Given the preparations for the this historically large wealth-transfer, is it even necessary to perform the tests?   Yes, if only to justify the handout.

So here’s our spoiler alert:  While prior seasons of this drama resulted in smiles and golf-claps and reassurances that everything was “okay”,  this season’s plot is a bit different:  It will involve stern words… and a gift of a trillion Euro.

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Oh wait.  No you didn’t.