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Were the E.U. bank stress tests too easy?

Bob Moon Jul 23, 2010

Were the E.U. bank stress tests too easy?

Bob Moon Jul 23, 2010


Kai Ryssdal: The big question for banks in Europe on this Friday was, what if? As in, what would happen if the global economy were to be hit by another recession?

European regulators have been curious about that so they did what the Treasury Department here did last year. They ran stress tests to see how 91 financial institutions might cope. Just seven banks failed the health check. Five in Spain, one in Greece, one in Germany. All of them smaller, regional banks. That means the continent’s big financial guns all got passing grades. Raising the not irrelevant question of just how stressful the stress tests really were.

Our senior business correspondent Bob Moon reports.

Moon: European officials might be forgiven for not wanting to put too fine a point on things. So says monetary analyst Ashraf Laidi at CMC Markets in London. He points to lingering doubts whether Europe’s banking system can weather the continent’s debt crisis.

Ashraf Laidi: We are right now at a time when the fabric of market confidence, and interbank lending, is stretched quite thin.

Heart monitor beeping

Laidi suggests Europe’s financial “physicians” were likely careful to avoid delivering any news that might throw the patient back into intensive care.

Laidi: They did not want to go into a situation where they would impose such stark tests that they would themselves trigger a new blow to market confidence.

Some analysts complain regulators failed to test the “worst case” — what would happen if a nation defaulted on its sovereign debt. Instead, the tests figured on banks holding such sovereign bonds to maturity — not what would happen if they actually became worthless in the meantime.

At Merk-Mitchell Funds, chief investment officer Axel Merk sees the skepticism as healthy.

Axel Merk: The pressure will remain on these banks. It’s not like the book is now closed and we’ll just move on and everything is going to be great in the eurozone. If there are some deficiencies in the stress test, plenty of analysts will go out there and pound on the table and say, “We’d like to have more information.”

In fact, European Union sources told Marketplace their report provides the raw data analysts can use to draw their own conclusions. That leaves Merk with one more question — what took so long?

Merk: It scares me a little bit that only once every couple of decades, a regulator comes in and says, “Maybe we should come in and check whether you guys can stomach a shock.” That is something that should happen every single day.

Merk says the final scores probably won’t be as important as that raw data might be in helping to calm the markets.

In Los Angeles, I’m Bob Moon for Marketplace.

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