David Blackburn

Testing times | 15 July 2011

Suffice to say, rather a lot is riding on the European Banking Authority’s (EBA) annual stress test, undertaken today. Finance ministers and creditors will be indulging all their superstitions in the hope that the tests restore confidence in Europe’s beleaguered financial institutions and the single currency.

More than a year’s preparation and politicking has gone into this moment of economic theatre. The Committee of European Banking Supervisors was wound up and replaced with the EBA. It was given a more stringent remit and the EBA has vowed to be on guard against hubris and over-optimism. By the end of the process, we are told, we should know the location of each and every bad debt; so there will be no more surprises to spook the markets; the recovery can begin.     

However, there are concerns that the EBA’s tests lack credibility because they do not take Greek banks into account, which is surely a colossal oversight.  Even if it did, there are doubts as to worth of the exercise. A financial services partner at Allen&Overy told Bloomberg that “the EBA has no teeth because the framework was set up to allow national regulators to keep supervisory powers.” This weakness is illustrated by German bank Helaba simply refusing to take part.

In addition to those worries, credit rating agencies are concerned that European banks might not have sufficient capital to meet the cost of rising bond yields in the eurozone. Italian and Spanish yields have risen to 6.02 per cent and 6.31 per cent respectively this week.

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