Financial strength: Good news can hide bad news!

A few weeks apart, two important pieces of information on the subject of banks’ financial strength were published.

The first is the analysis of the results of the stress tests carried out in the first half of 2012 by the Autorité de contrôle Prudentiel (ACP) on French financial institutions and insurers.

The second is the annual ranking of the American magazine Global Finance among the 50 safest banking institutions in the world.

financial strength

A good result followed by a bad surprise

Good resistance to stress tests….

The ACP analysis concerned the 8 largest French banks representing more than 97% of the total French banks, 12 life insurers representing 70% of the market and 13 property and casualty insurers representing 50% of the non-life insurance market.

Aimed at measuring the resilience of individual institutions to hypothetical, macroeconomic or financial shocks, these studies were based on the observation of bank behaviour in two scenarios: one “central” and the other “unfavourable”, for each of which different indicators were observed: solvency indicators including sovereign stress, liquidity indicators and contagion indicators.

Carried out at the heart of the European sovereign debt crisis, these tests therefore took into account an already particularly deteriorated macroeconomic and financial context.

In this context, the results are quite satisfactory:

Solvency stress results reflect the ability of French banks to withstand a significant deterioration in the economic environment, while being able to comply with the new requirements of CRD IV:

all banks have a ratio higher than 9% over the entire horizon in the central scenario, and higher than 8% in the opposite scenario. (1)

In addition, by simulating a partial dysfunction of the interbank markets (“wholesale funding”), liquidity stresses made it possible to measure the vulnerability of this source of market financing for the banking sector and, on the other hand, the existence of large reserves of collateral eligible for the ECB enabling them to cope sustainably (for more than a year) with a crisis episode, by using the ECB. (1)

Finally, stress tests on interbank exposures have shown the strong resilience of the French banking system to contagion risks(1).

The results are equally satisfactory for insurers:

those specialized in life being in a position to absorb through profit-sharing a significant level of losses in the adverse scenario.

Non-life insurers, starting from high solvency levels, do not see their solvency put at risk in the unfavourable scenario.

However, only 3 French banks are in the top 50 safest banks in the world

This study, conducted every six months by the American magazine Global Finance, takes into account the amount and quality of assets as well as the rating given by each of the 3 rating agencies S&P, Moody’s and Fitch and their developments…

Although dominated globally by European banking institutions, which once again take the top 10 places and a total of 19 of the 50 places compared to 5 for the United States, the ranking only includes 3 French banks:

The Caisse des Dépôt et Consignation, although affected by the downgrading of France’s rating, is in 7th position, losing 5 places compared to August 2012.

More surprisingly, the other 2 French institutions in the ranking are Banque fédérative du Crédit Mutuel (38th) and Banque Postale (44th).

BNP Paribas, which was still present in mid-2012, dropped out of the ranking following the downgrading of its rating by S&P.

From 6 institutions in 2011, the French representation was divided by 2 in 1 year, impacted in particular by the crisis in the euro zone and the high exposure of its institutions to this zone and its risks.

Nevertheless, the euro zone, although under pressure from the currency crisis, holds the best positions: 9 of the top 10 institutions in the ranking come from countries in this zone: 4 German, 3 Dutch and 1 Luxembourger support the CDC in this Top Ten, completed by the Swiss Zürcher Kantonalbank.

Among the other countries significantly represented are Canada with 5 schools ranked between 11th and 30th place and also Singapore, or Australia.

In the significant movements we will note 3 new entrants: two South Korean banks – Korea Finance and Industrial Bank of Korea – which are entering the ranking, respectively in 33rd and 40th place, as well as the Norwegian DnB, which is in 50th position.

The biggest improvement in the ranking is to be credited to the Chilean Banco estado of Chile, who moved up 6 places to 36th place.

Let us bet that the improvement in the financial situation of the euro zone, if it surpasses the Cypriot episode, will encourage the return of French institutions in the next ranking…

Pierre LIEBAERT

(1) sources: Analysis and synthesis – Stress tests on the banking system and insurance institutions in France (ACP 01-2013)

(2) http://www.acp.banque-france.fr/uploads/media/201301-stress-tests-systeme-bancaire-et-organismes-assurance-en-france.pdf

(3) http://cdn.gfmag.com/images/stories/attachments/140_SafestApril2013_.pdf

Pierre LIEBART


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