More on European Stress Tests
Stress tests on European banks have emerged as a key talking point. The criteria is not clear, though European officials are apparently telling anyone who is interested that the these tests are more robust than the previous tests conducted last October.
One difference between the US and European approaches is that the former indicated that it was prepared to offer funds to those banks who needed it while the later appears to have ruled it out.
Apparently the European bank stress tests focused on loan losses and not on sovereign exposure. This would benefit some banks over others.
Spain and Italy are on the forefront of insisting on publishing the results, while Germany and Netherlands seem to be resisting. German law prevents the government from forcing banks to reveal their capital base. Initially there was some suggestion that the German government would seek to change the law. However, now it seems that if the banks agree, the results of the stress tests will be published. This seems like a bit of an uphill battle. The German landes bankens (regional banks) are vocally opposed and that may contribute to the opposition of some of the larger German banks.
In the Netherlands, a group representing banks announced its opposition to publish the results earlier today. While major Dutch banks appear to have adequate capital reserves, the association appears to be worried about the impact if some banks are under-capitalized. It worries that the market’s reaction may punish the healthy with the sick.
The British Bankers’ Association is also opposed to publication of the results of the stress test on an individual bank level essentially on the same grounds. However, the politicians and shareholders seem to see the benefits in terms of transparency and investor confidence outweighs the potential risks.
The details of the stress tests and the results are expected to be reported in some fashion by the end of next month. Officials intimate that additional stress tests will be conducted.
Unless the results are shown for individual banks they will all be punished by the markets for hiding losses and liabilities. The stress tests need to include sovereign debt as well. Some debt is clearly better than other debt. The rigging of the stress tests so that they all pass will not improve confidence. All the big banks are sitting on huge piles of junk and are hiding it, we know it, they know it, the regulators know it, yet they are all pretending it is fine.