Cantor Fitzgerald

Cantor Fitzgerald Comments: 'It's Like Sending The Banks Away For A Weekend Of R&R'

July 26, 2010, NPR Online

So those long awaited "stress tests" of European banks were released Friday. The idea was to give the world a clearer idea of how Europe's banks would fare if the economy were to head south again.

But the tests made some remarkably rosy assumptions — and so failed to show what would happen in a significant downturn.

"I see nothing stressful about this test," the chief global equity strategist at brokers Cantor Fitzgerald told Reuters. "It's like sending the banks away for a weekend of R&R."

Two key problems with the tests:

1. Sovereign debt: The tests didn't fully consider what would happen if countries in fiscal trouble default on their debt. Many banks have invested lots of money in sovereign bonds that the banks plan to hold until maturity. The tests failed to ask the basic question: So what happens to those banks if the a government can't make good on its debt?

2. Adverse scenarios: Regulators in each country decided what assumptions to use for the adverse scenarios used in the tests. Some key details didn't seem particularly adverse, the WSJ notes. On average, regulators assumed unemployment would rise to 10.8 percent under an adverse scenario — up from an average of 10.7 percent this year under the baseline scenario.

Still, the FT notes, the data released on the 91 banks that participated in the tests may ultimately be useful. The information will allow investors to conduct their own stress tests — and those tests may be far harsher than the ones just released by regulators.