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 |2014-09-11T15:33:25-04:00July 19th, 2010|Global Market Update|0 Comments

About the Author:

Mr. Tengdin is the Chief Investment Officer at Charter Trust Company and author of “The Global Market Update”. The audio version of each post can be heard on radio stations throughout New England every weekday. Mr. Tengdin graduated from Dartmouth College, Magna Cum Laude. He received his Master of Arts from Trinity Divinity School, Magna Cum Laude and received his Chartered Financial Analyst (CFA) designation in 1992. Mr. Tengdin has been managing investment portfolios for over 30 years, working for Bank of Boston, State Street Global Advisors, Citibank – Tunisia, and Banknorth Group. Throughout his career, Mr. Tengdin has emphasized helping clients manage their financial risks in difficult environments where they can profit from investing in diverse assets in diverse settings. - Leave a comment if you have any questions—I read them all! - And Follow me on Twitter @GlobalMarketUpd

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