Stressing Out

The European bank stress test results are due Friday. What are we likely to learn?

On Friday the European bank regulators will release the results of stress tests on 91 banks. The tests have been done on a bank-by-bank basis and the results are supposed to be released on an individual bank basis and in aggregate. The tests include a macroeconomic shock and a sovereign debt shock—at least something worse than this last May.

Banks being tested include the usual suspects, like Royal Bank of Scotland, Lloyds, Societe Generale and Deutsche Bank. Also included are the Spanish cajas and German regional banks. All-in-all, 65% of Europe’s banking sector is being examined.

But what will be disclosed? Ah, there’s the rub. Because the genius of the American stress test was its fairness and the fact that some of the banks had to go out and raise capital. The tests were tough enough that some failed. But what we hear Friday may be different. Already France’s economic minister is predicting that the tests will show “That European banks are solid and healthy.” Well, I’m glad that he’s so confident. Or maybe he’s just “talking his book.”

One thing’s certain: if the stress tests come out and every bank passes—if all the children are above average–they will have no credibility and the markets will assume that they were just an elaborate charade. The sell-off will then resume. Because when everybody’s special, nobody is.

Douglas R. Tengdin, CFA
Chief Investment Officer
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By | 2014-09-11T15:33:25+00:00 July 19th, 2010|Global Market Update|0 Comments

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