Stressing Out Over Stress Tests

Worried about what the government's "stress tests" will reveal about the U.S. financial system when the feds begin to privately disclose the results to America's biggest banks today?

Take some comfort in knowing that no matter how bad things are in New York, Charlotte, and San Francisco, they're probably better than the situation in Frankfurt, Paris, and Edinburgh.

A young Swiss credit-analysis firm did its own analysis of 17 leading banks around the world and concluded that American banks are in pretty good shape, especially compared with their rivals across the Atlantic. "The biggest risk is in Europe," Peter Jeggli, founder of Independent Credit View in Zurich, told the Daily Telegraph in London.

"Americans are ahead of the curve," Jeggli said. "European banks are exposed to U.S. commercial real estate and to problems in Eastern Europe and Spain, where the situation is turning dramatic. We think Spanish savings banks are basically bust and will need a government bailout."

To back up his assertion, Jeggli said his firm's research concluded that Deutsche Bank has on hand enough reserves to cover a default rate of 0.7 percent; that compares poorly with its ratio of non-performing assets, which is 1.67 percent.

RBS has enough reserves to handle a 1.23 percent default rate; its non-performing assets now comprise 2.43 percent of its loan portfolio. Credit Agricole, meanwhile, has set aside reserves sufficient to cover a 2.63 percent default rate, while reporting that 3.64 percent of its loans are non-performing.

Contrast that with U.S. banks. J.P. Morgan -- Portfolio.com's pick as the new king of Wall Street -- has reserves equivalent to 3.11 percent of its loans, of which 1.95 percent are considered non-performing. Even on-the-ropes Citigroup's reserves, 4 percent, more than cover the 3.22 percent of loans it says are non-performing.

Perhaps American banks are just more realistic about how deep a hole they have dug themselves into. As the International Monetary Fund noted earlier this week in its semiannual Global Financial Stability Report, U.S. banks have written down the value of their suspect loans by $510 billion, or about 48 percent of the $1.05 trillion haircut they will ultimately suffer. European banks outside Britain, meanwhile, have written down $154 billion in assets, a mere 14 percent of the $1.1 trillion in losses the IMF expects them to suffer by the end of next year.

Now that's stress.

by Mark Stein