1. We think the size of the recap is more likely to be €100bn+ and think the €200-300bn street estimates too high
2. To reduce the burden on the public purse, banks will be given 6 and maybe up to 9 months to recap – leaving many uncertainties
3. We think the market has misread some of the dimensions around individual banks.
4. We fear that the “benchmarking” will not differentiate by quality of loan book and bank’s position, particularly for Spain, Italy and the periphery.
5. We are very concerned banks will also have the incentive to delever more quickly (a “crash diet”) to pass the tests.
6. Bank and regulator behaviour (e.g. whether to recap or shrink fast) will be key to how much risk there is to economic recovery.
7. To slow bank deleveraging, more could be done to support bank funding during the uncertainty.
8. The success of the exercise is entirely dependent on the nature of sovereign backstops since this number is not recapping to a “stressed” scenario.
9. Another key risk is on how banks appetite for sovereign bonds may change
10. We think investors should also reflect on the signal this sends about Basel III and impact on dividends and size of capital raises for wholesale banks
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