Dexia Shares Fall Off A Cliff: Bank Had Passed Stress Tests!

Dexia chart (in Euros):

Dexia was subject to the 2011 EU-wide stress tests conducted by the European Banking Authority (EBA). It had passed the tests!

"Dexia’s strong capital base would enable it to weather the set of assumptions of the EBA stress tests, while still maintaining strong capital ratios, even if these assumptions look very conservative, notably for sovereigns, local authorities and the potential evolution of the funding costs."

Today the bank's shares are down a cliff. Amazing stuff.
From Dexia press release:

"Dexia notes the announcements made today by the EBA and the National Bank of Belgium on the EU-wide stress test and fully acknowledges the outcomes of this exercise.

The EU-wide stress test, carried out across 91 banks covering over 65% of the EU banking system total assets, seeks to assess the resilience of European banks to severe shocks and their specific solvency to hypothetical stress events under certain restrictive conditions.

The assumptions and methodology were established to assess banks’ capital adequacy against a 5% Core Tier 1 capital benchmark and are intended to restore confidence in the resilience of the banks tested. The adverse stress test scenario was set by the ECB and covers a two-year time horizon (2011-2012). The stress test has been carried out using a static balance sheet assumption as at December 2010. The stress test does not take into account future business strategies and management actions and is not a forecast of Dexia’s profits.

As a result of the assumed shock, the estimated consolidated Core Tier 1 capital ratio of Dexia would change to 10.4% under the adverse scenario in 2012 compared to 12.1% as of the end of 2010. This result incorporates the effects of the measures announced and fully committed up to 30 April 2011 and the mandatory restructuring plans agreed with the European Commission before 30 April 2011 and does not take into account future mitigating actions planned by Dexia.

Details on the results observed for Dexia:

The EU-wide stress test requires that the results and weaknesses identified, which will be disclosed to the market, are acted on to improve the resilience of the financial system. Following completion of the EU-wide stress test, the results determine that Dexia meets the capital benchmark set out for the purpose of the stress test. The bank will continue to ensure that appropriate capital levels are maintained.

Dexia’s strong capital base would enable it to weather the set of assumptions of the EBA stress tests, while still maintaining strong capital ratios, even if these assumptions look very conservative, notably for sovereigns, local authorities and the potential evolution of the funding costs".