′Bank stress tests not rigorous enough,′ say analysts | Business| Economy and finance news from a German perspective | DW | 24.07.2010
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'Bank stress tests not rigorous enough,' say analysts

Despite better-than-expected stress test results, analysts warn that Europe's banks still need reform. The test criteria, they say, were too weak. Europe now waits to see if the tests will impress investors.

Euro sculpture in front of the European Central Bank

Analysts warn that strong results reflect a weak test

Despite the positive results of Europe's bank stress tests, analysts and politicians are warning that the banking system is still in dire need of reform.

All but seven of the 91 banks tested in 20 countries passed the test. Investors are expected to focus on the dozen or so banks that just made the cut when markets reopen Monday.

Many have criticized the tests, published Friday by the London-based Committee of European Banking Supervisors, for lacking rigorousness.

German banks 'robust'?

Although German Finance Minister Wolfgang Schaeuble celebrated the test results as a sign that German banks were "robust and resistant," Green party financial spokesman Gerhard Schick warned that "German banks are and remain unsteady."

Wolfgang Schaeuble

Critics say Schaeuble is celebrating too soon

Meanwhile, the president of the German Institute for Economic Research (DIW), Klaus Zimmermann, expressed fears the positive results may give the "fatal impression" that a full overhaul of the bank system is no longer necessary.

"Unlike in the US, the necessary European financial reforms haven't even been fully discussed, let alone finalized or implemented," Zimmermann told the website of financial daily Handelsblatt.

'Declaring the corpses dead'

Analysts also said the exams themselves were not tough enough to bring any good, other than restoring some confidence to investors.

According to Daniel Gros, head of the Centre for European Policy Studies, Europe wasted an opportunity by not pushing harder criteria - and by leaving crisis scenarios out of the tests, such as a real estate crash, the collapse of the raw goods market or total defaults by a eurozone state - as could have occurred in Greece earlier this year.

"The stress test declared the corpses as dead," Gros told German news agency dpa in Brussels. "We know a bit more now about where the shaky candidates are. But the test didn't bring any real insights."

Gros believes the results of the tests will have the intended effect of calming investors' fears but lamented that "whitewashed" test criteria prevented what could have been an "opportunity to really clean up the banking sector."

The economist warned that European banks still often had very close ties to each other, meaning that "if a large bank fails, the whole system would be in danger."

A man with a line graph above his head

Europe waits to see how the world's markets will react to the results

Nervous wait

The stress tests were never expected to show massive capital shortfalls, as European banks had already raised about 300 billion euros ($387 billion) since the financial crisis began, including 170 billion euros of government support to 34 banks.

"With so few banks failing, investors will question whether the economic scenarios [simulated by the tests] are sufficiently severe," said Jon Peace, analyst at financial group Nomura in London.

"It will be natural for investors to consider the margin by which banks passed," he added, citing a good pass margin for Scandinavian and British banks, with Greek, Spanish and Italian banks faring less well.

Hypo Real Estate was the only German financial institution to fail the test. Bundesbank Vice President Franz-Christoph Zeitler explained that "in the regulators' view, no other German bank needs further capital," maintaining, however that "the markets could see that differently."

The euro fell late Friday just after the publication of test results, but quickly bounced back. US stocks also rose slightly on Friday.

European governments must now wait for markets to reopen on Monday in order to get the full global reaction.

Author: David Levitz (AFP/apn/dpa/Reuters)

Editor: Martin Kuebler

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