Spanish bank Banco Santander was halted on Thursday, followed by an announcement it would raise capital. When the bank reopened its shares plummeted as much as 14%, with the Spanish stock market down about 4%.

Banco Santander (SAN) passed the last “stress test” so allegedly it had no need to raise capital.

With that thought in mind, let's recap the ECB's love affair with stress tests that seldom find much need to raise capital.

On June 22, 2012, I commented Laugh of the Day: Stress Tests Show Spanish banks Only Need Between €16bn and €62bn in New Capital; ECB to Accept BBB- Rated Debt (One Step Above Junk) as Collateral.

In October 2013, after two previous stress tests blew sky high, ECB president Mario Draghi announced that he would not hesitate to fail banks in the third test.

In Translating “Draghize”, I commented “When it comes to stress tests, especially for European banks, the one thing history suggests is the tests will be essentially stress-free, by design. Why should this time be any different?”

Translating Draghize

For those of you who do not speak Draghize I offer these translations.

Draghize: “Banks do need to fail to prove the credibility of the exercise”.
Mish: We are carefully scrutinizing several non-critical banks, looking for a couple of scapegoats, hoping to fool the public regarding the credibility of the exercise.

Draghize: “If they do have to fail, they have to fail. There's no question about that.”
Mish: If any big banks are in trouble. They won't fail. There's no question about that.

Draghize: “The test is credible because the ultimate purpose of it is to restore or strengthen private sector confidence in the soundness of the banks, in the quality of their balance sheets”
Mish: The test is credible because we say it is.

Stress Tests Watered Down

On January 16, 2014 I commented ECB Waters Down 2014 Stress Tests Second Time; Yet Another Sham Stress Test.

One of the things the ECB watered down was in relation to sovereign bonds. They were assigned a “zero risk”. Do Greek bonds look like zero risk here?

The second thing the ECB did was make a 25% reduction in the amount of capital banks had to hold.

Stress Tests Announced

On October 27, 2014 alleged stress tests were a glowing success. The ECB announced Most Banks Are Healthy, failing only 13. Another 12 would have failed but had already taken steps to raise sufficient capital.

The Wall Street Journal posted a table of Participating Banks With a Shortfall. The list includes all 25 banks.