U.K. asset manager M&Gm who is part of the UK insurance company Prudential, has slammed the European bank stress tests.
It’s not just that the tests were too easy, it’s that they didn’t even test the right types of stress, says M&G:
“What investors would like to know is, even if 84 of the banks passed a notional stress test to end-2011, does that really mean they’ll all be able to meet Basel III requirements on capital and liquidity by 2012? The current evidence does not suggest so,” says Tamara Burnell, head of financial institutions credit analysis at the £99 billion firm.
“The stress tests were testing the wrong thing. It’s not just the asset side of the balance sheet that needs stressing or fixing, it’s the liability side. Clearly most banks are failing the market’s funding test, since they can’t fund without government support of some sort. To this end, and irrespective of all the issues about whether the list of institutions was full enough, the stress tests were always going to be a bit of an irrelevance. It’s the funding model that’s broken.”
You can read about what Basel III is and how it will affect banks here.