You could fill a library several times over with online commentary on the causes of the 2008 crisis, and talk of the systems that have been put in place to prevent a repeat aren't far behind.
But what of the response to regulators' recent stress testing requirements? And specifically, how should bank analysts use these findings when assessing the creditworthiness of a bank? How might these results impact on the credit facilities that are offered to a client bank?
The concept of stress testing by regulators – which boils down to determining if a bank has sufficient capital under a series of highly negative scenarios – began in 2009.
Regulators in many countries now require at least annual stress tests for systemically important banks, under conditions specified by the regulator. Some, like the US, UK and the European Banking Authority (EBA), give detailed disclosures on bank performance under stress. Other central banks publish a Financial Stability Report that is light on bank-specifics but certainly provides insight into the issues facing banks in those markets.
Good work is being done here. But these tests aren't perfect, and third-party assessment should usually entail a lot more than simply accessing these test results on their own.
Let's look at why.
The tests and associated regulations deal primarily with key performance ratios. But in isolation and as a one-size-fits-all measure, these are usually insufficient for tailored third-party assessment, given the many differing variables from one bank to the next.
The stability of a bank – and therefore whether and how you should do business with it – calls for a more holistic approach; look at its stress testing results, certainly, but also scrutinise the context. Other financial data, where the bank is based, its corporate ownership structure, performance of its management, micro-economic factors peculiar to the specific sectors it serves: these factors and many more should also feature on your consideration radar, and should contribute to your capital expectations of them.
This is where you need access to rich, detailed and regularly updated company information databases. One such example is Orbis, Bureau van Dijk's global database of more than 280 million companies; a sector-specific example is its sister database, Orbis Bank Focus, which holds detailed information on more than 40,000 institutions.
These databases provide several ways of assessing companies' creditworthiness and financial strength.
Later this month, Sarah de Quant of Adeva Partners and I are hosting a webinar for which these issues provide a backdrop.
How much capital is enough? Evaluating the credit standing of banks in different markets – what do we know post financial crisis? takes place online at 3pm GMT on Thursday 16th March.
Register here to attend the webinar.
The webinar discusses:
- The challenges and solutions sought by banks that are most in need of capital. The discussion will range from banks in Italy and other parts of Europe, as well as banks operating in emerging markets, such as China and Nigeria.
- The causes and effects of these different capital crises, showing which financial and market indicators are most effective in identifying and quantifying the key issues.
- For comparison, we will also contrast these situations to US and European banks that have successfully rebounded from the 'dark days of the financial crisis' when they required government bail-outs.
We will look at financial indicators that showcase management actions and discuss whether the high levels of total loss absorbing capital should give us comfort or concern. Might these strong figures possibly weaken the political will that drove these reforms?
We'll conclude with a summary of the analytic frameworks and tools that will help you make your own assessment.
Register for webinar
An edited version of this blog post first appeared in BBA Voice, the blog of the British Bankers' Association.
A brief history of stress testing
Financial Services Authority (UK)
- 2008 Stress and scenario testing CP08/24
- 2009 Stress and Scenario Testing Feedback on CP08/24
Bank of England (UK)
- Annual industry stress test
European Banking Authority (Euro area)
- 2010 onwards: European Union bank stress test
- 2011 onwards