Analysts dismiss flawed stress tests

A person withdrawals money from a AIB Bank Automated Teller Machine in Dublin, Ireland November 21, 2010. Allied Irish Banks was rocked Friday as it revealed customer deposits have plunged 13 billion euros (17.8 billion dollars) since January and said ongoing EU/IMF bailout talks could affect its future. European Union finance ministers will address Sunday night an imminent bailout request from Ireland after the government in Dublin began discussing a recommendation to call for aid, diplomats told AFP.

STACEY VANEK SMITH: A series of stress tests on European banks is causing a lot of stress this morning. That, in spite of the fact that the results seemed pretty good. Eighty-two out of 90 European banks were deemed strong enough to survive another financial crisis.

Our own Stephen Beard in London joins us live. Good morning, Stephen.

STEPHEN BEARD: Hello Stacey.

SMITH: So just to start out very basically, what exactly is a stress test?

BEARD: Well, it poses the question: What if the worst-case scenario occurs, like a recession? Which banks would not have enough money to cope? So you identify the weaker banks and get them to beef up their capital before the next crisis. You may recall the U.S. ran stress tests in 2009, and they were credited with helping restore confidence in the banking system after the near meltdown of 2008.

SMITH: Right. But these European tests haven't been so successful. Is that right?

BEARD: No, that's right. They're the second set run by the European regulator. The first were widely derided as too soft. The second were tougher but many analysts say they're still not tough enough. For example, the worst-case scenario does not include a debt default by a European government like Greece, which is the one thing of course many investors fear maybe eminent.

Carsten Brzeski of the ING Ban told the BBC in Brussels why the regulator had ignored the possibility of default, or restructuring.

CARSTEN BRZESKI: This is a political thing. Because for a long while, debt restructuring in a European country was simply a no-go in European institutions. So this was why, politically they didn't dare to test it.

There's another analysts here who says this European stress test is beginning to resemble the Irish driving test in the 1980s. If you failed it once, you took it again. If you failed it a second time, they gave you the license anyway. Which might explain the high number of car crashes in Ireland.

SMITH: Our own Stephen Beard from London. Only you could have an Irish driving test comparison Stephen. Thank you.

BEARD: OK Stacey.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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