23rd July 2010 by Shaun Richards
I felt it might be helpful to post some initial thoughts on the European bank stress tests.
1. Seven banks have failed of which five are Spanish. The banks are Germany’s Hypo Real Estate, Greece’s Atebank and Spain’s Espiga, Diada, Unnim, Civica, and Cajasur.
This is simply far too few for the process to have much credibility. It also really stretches credulity that only one Greek bank has failed. The total capital required is only 3.5 billion Euros.
2. The economic scenario where there was supposed to be an impact on economic output was so weak as to be virtually pointless.
3. The scenario for stress testing for sovereign risks on first reading appears to punish prudent banks more than the imprudent in certain circumstances.
I am sure that a rally in the riskier banks which avoided any censure in the stress tests may well take place. In some ways this rally may well be a better guide than the stress tests as to who has issues. Apart from that they seem to have been a waste of time as the tests were simply too weak. I was afraid that the organisation CEBS lacked real bite and knowledge and this is what has transpired. In addition Spain’s Prime Minister and Finance Minister both said that Spain would come out of these tests well and indeed Elena Salgado said none had failed. So their credibility as witnesses are somewhere around zero I would think.Have a good weekend.