EU Agrees to Disagree on Banks Stress Tests
The International Monetary Fund’s (IMF) call earlier this week for Europe to conduct stress tests on individual banks has again put the solvency of European banks and the EU’s efforts to clean up bank balance sheets into the spotlight. The solvency ratios of European banks are often lower than those of their US counterparts, making them more vulnerable to write-downs and requirements to raise further capital. The IMF likened the stress tests to a good “spring cleaning.”
Most estimates show that European banks still have significant write downs ahead of them, which in turn will make further government interventions necessary. For instance, the Belgian government on Thursday had to step in to help its troubled banking sector by offering guarantees to KBC Bank. The measure became necessary through the possible default of MBIA Inc, the New York-based bond insurer.
However, European banks argue that US-style stress tests are less applicable to their institutions, because the economic fundamentals and accounting rules are different. The EU officials are also satisfied that individual national regulators have long been conducting stress testing and that there is no need to make them public.
German Finance Minister Peer Steinbruck on Wednesday criticized the idea of EU bank stress tests, saying, "We are seeing that the stress test in the US is worthless because the central bank exercised influence as well as the Treasury.” Meanwhile, France’s Banking Commission would not comment on the IMF proposal. Last month, however, the commission’s chairman, Christian Noyer, who is also governor of the French central bank, said he has every confidence in France’s regularly conducted stress tests.
The debate on the fundamental issue of who should supervise and perform stress tests seems likely to continue with widely diverging views represented. The Commission’s upcoming proposals for a new financial supervisory infrastructure in the EU are therefore much anticipated and will be closely scrutinized.
The early feedback on the stress tests in the United States is positive. The results of a Gallup Poll, released 13 May, show that Americans’ confidence in banks has improved “slightly, but to a statistically significant degree” since the Treasury posted the stress test data. In a Wall Street Journal survey of 52 leading economists, half rated the stress tests as helpful. Only time can tell if the stress tests will prove to be a significant factor in restoring US financial stability. Certainly the Obama Administration believes what Treasury Secretary Geithner has said, that “the bank stress tests should advance the process of repairing our financial system and provide a better foundation for recovery.”
