Are European Banks Simply Being Allowed To Stress-Test Themselves?

Banco Santander Spain

Photo: Wikimedia

There’s been plenty of guffawing about the upcoming release of stress tests for top European banks.Basically, nobody thinks we’ll learn much, other than that top officials will say they’re mostly well capitalise. After all the point of stress tests is to instill confidence, not to expose gaping capital holes.

Alas, there’s more and more evidence that they’ll be a flat-out joke.

Jeremy Warner at The Telegraph writes:

In Britain, the EU stress testing has at least been conducted by the FSA, the prudential regulator, but in Germany and Spain, according to City hearsay, the banks have been allowed to stress test themselves, with the regulator just collating the forms.

This is a bit like the multiple choice papers that today masquerade as a proper examination. For grade A, tick this box, but if you really must have a B, tick this one, and so on. Only a fool would come up with the wrong result.

Perhaps this is an exaggeration, but we’re guessing the gist is correct. Regulators and banking chiefs are looking for specific numbers (they can’t be too perfect, otherwise they’ll have zero credibility), and so the goal is to just finesse things to hit the spot just right.

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