Finance: Moment of truth for the banks
16 July 2010
The pending stress tests of Europe’s banks, designed to evaluate likely performance in a number of economic scenarios, due on July 23, have been chaotic and less than ideal—but ensuring its banks are in a fit state to trade, and proving it to the markets, is essential to the EU, warns The Economist.
When America stress tested on its banks in 2009 it helped end the panic on Wall Street. The Federal Reserve opened banks’ books, imposed a consistent view about how bad losses might be and forced banks that lacked capital to raise more, with the taxpayer acting as a backstop investor.
The EU will soon follow suit, with the results due on July 23rd. Yet whereas America’s tests were run in military style, Europe’s efforts have been chaotic – more akin to a row about cod quotas than the recapitalisation of the world’s biggest banking system.
Banks and transparency are not always a good combination. When a carmaker admits it has a problem, its factories are still there a week later; when a bank does so it usually suffers a devastating run. This is why regulators sometimes like to deal with dud banks in secret. But when there is already a widespread loss of confidence, sunlight is the only treatment left. That happened in Japan in 2002-03, when zombie banks were prodded to own up to their bad debts, and in America last year. Europe has reached a similar point. Read the full article in The Economist.