By Marc ChandlerThe market awaits more details about bank stress tests from the Committee of European Bank Supervisors. If the market has a better sense of the robustness of the stress tests it might lift some uncertainty among investors. There are several reasons why investors are anxious. Many of them are listed here, cobbled together from various media reports. This is not meant to be exhaustive but is suggestive of some of the key issues.
- The credit default swaps for Europe's top banks are about 50% higher than those for top U.S. banks.
- Europe's top 20 banks trade at a discount to book value of a bit more than 10%. The top 20 U.S. banks trade at a modest premium to book value.
- The International Monetary Fund projects that by the end of this year, U.S. banks will have written down about 7% of their assets while eurozone banks will have written down about 3%.
- The Bank for International Settlements reports that at the end of last year European banks had assets valued at 31.1 trillion euros -- some 3.5 times more than U.S. banks. Given that the economies are roughly comparable, it points to significantly greater leverage.
- In late 2008, EU leaders pressed for an accounting change to allow banks to avoid marking down asset values to the plunged market values unless default was thought likely. Some reports suggest this accounting shift helped "save" billions of euros.
- It is not immediately clear what happens to a bank that is judged to need capital. That said, several countries have bank funds that might be able to be drawn upon.