EU countries to publish bank stress test

All European Union countries will publish the results of stress tests on their banks in the second half of July at the latest to boost investor confidence in the financial sector, EU President Herman Van Rompuy said.

"We agreed that the so-called stress tests of banks will be published at the latest in the second half of July," Van Rompuy told a news conference after a summit of EU leaders yesterday (17 July).

Spanish Prime Minister Jose Luis Rodriguez Zapatero, also present, said publishing the results was the best way to stop rumours about the condition of Spanish and other banks.

"There is nothing better than transparency to demonstrate solvency," Zapatero said.

"These stress tests must be demanding in nature. We need to look at the most stringent tests possible in terms of our growth because that will favour our credibility," he said.

The EU has so far conducted only one stress test of its whole banking sector, not individual countries or banks. 

European Commission President José Manuel Barroso wants the disclosure of the results of ongoing stress tests on a bank-by-bank basis. He asked the Council for a firm commitment on this.

But German Bundesbank head Axel Weber said yesterday that a new set of European bank stress tests was needed to include a broader swath of the banking industry as well as new stress scenarios such as the sovereign debt crisis.

Speaking at a conference in Frankfurt, Weber – also a member of the European Central Bank's Governing Council – said he had pushed for disclosure of the stress test results "by bank and by country" on an international level.

Germany had been sceptical about revealing details of tests on the financial health and risk exposure of its banks, but has dropped its objections after France and Spain came out in favour of a move the United States has pressed Europe to take.

Banks remain undecided on whether disclosure makes sense.

The Association of German Banks, which represents large private-sector lenders such as Deutsche Bank and Commerzbank CBKGn.DE, said it may be open to disclosure, providing the results leave no room for "misinterpretation".

The German association of public-sector banks, which represents the troubled Landesbanken sector, opposes such disclosure.

IMF joins calls for better information on key European banks

The International Monetary Fund on Thursday threw its weight behind calls for better information on key European banks' exposure to sovereign debt.

The IMF recommendation came on a day when France signalled that publication of fuller results from bank stress tests in Europe could take place within weeks, and European Union leaders broached the issue at a summit.

"More transparency and better communication may help the market assessment of the French financial system," the IMF said in a statement concerning a regular review of France's economy, the euro zone's second largest after Germany.

"In the context of the sovereign debt crisis, earlier calls for better information on European – including French – banks re-emerged," the statement continued.

"The authorities and market participants are rightly concerned that certain types of stress test – in particular those stressing sovereign risk – could contribute to a deepening of the crisis," it said.

(EURACTIV with Reuters.)

"The 'normal' state of the financial system in the past two years was beyond the realm of most pre-crisis stress tests. The difficulty now is that any convincing stress tests will now need to include scenarios of extreme market dislocations that were considered impossible until recently. Under some of these, the whole European banking system may be insolvent," said Sony Kapoor, a former banker and current financial adviser to policymakers.

"When you try to hide something it will come out sooner or later," said German Chancellor Angela Merkel.

Financial markets across the globe went into a tailspin following the US sub-prime mortgage crisis in early August 2007, forcing central banks to make massive cash injections to keep the system rolling and fend off a possible liquidity crisis. The situation became critical as the trouble spread across wider financial markets, affecting some of Wall Street's best-rated investments and plunging the US into recession. 

While Europe was initially not too badly affected by the turmoil, the crisis stormed into the continent at the end of September 2008. A number of EU countries were forced to apply emergency measures to salvage their banking institutions and prevent a collapse of the financial system, with the European Commission fast-tracking the approval of bank bailout plans to prevent confidence from plunging further. 

Last year, Brussels pushed for banks in need of state aid to undergo stress tests in order to assess the viability of their restructuring plan (EURACTIV 24/07/09).

The EU has so far conducted only one stress test for the banking sector as a whole, rather than for individual countries or banks. The results, published in autumn 2009, indicated that the sector was sound and could withstand a much worse economic downturn than the one which took place.

  • End of July: Publication of banks' stress tests.

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