European stress tests: Let’s try again

“THIS time is different” is a slogan usually to be found on the lips of bullish financiers and investors. But in effect this is the message that European regulators are trying to send as they set out how this year’s banking stress tests really will mark a break from the past. Today the European Banking Authority (EBA), which is responsible for coordinating the tests across the 28-country EU, gave more details on how they will work.Banking stress tests in Europe have a chequered history. Whereas the ones conducted in America in 2009 succeeded in restoring confidence in the financial sector, the European attempts if anything added to worries about the health of banks as their findings were quickly undermined by subsequent failures. Stress tests in 2010 gave a clean bill of health to Ireland’s two biggest banks just months before the entire Irish banking system fell to pieces. The exercise in mid-2011 gave a ringing pass to Dexia, which was ranked the twelfth safest among 91 under scrutiny; soon afterwards, the troubled Franco-Belgian bank had to be rescued for the second time.This credibility-sapping history explains why European regulators are so anxious to make sure that this time really will be different. There are several reasons why this may indeed be the case. The most salient is that the stress tests in the 18-state euro zone form part of a much larger probe into its …

Link to article: www.economist.com/blogs/freeexchange/2014/04/european-stress-tests?fsrc=rss

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