EU regulators want tougher stress tests

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A body that is on the cusp of gaining more binding powers in the EU, the Committee of European Banking Supervisors (CEBS), has devised more stringent methods to test whether banks in the EU are financially sound.

The new guidelines will ask banks to pinpoint possible threats to their solvency to prevent a false sense of security that may come with more tame examinations.

These so-called reverse scenarios had previously been dropped at the request of the European Savings Bank Group, which argued that the "marginal additional findings" these tests would produce would not justify the cost for companies of carrying them out.

The guidelines must be implemented by firms by the end of this year and should also become an integral part of a bank's internal risk management and decision-making, said CEBS.

A round of July tests, coordinated by CEBS, revealed seven of 91 failures under scenarios which assumed ongoing negative growth rates and losses on sovereign debt.

But a host of critics said the tests were not rigorous enough and were purely a public relations exercise in an attempt to soothe jittery markets.

"I see nothing stressful about this test. It's like sending the banks away for a weekend of R&R," said Stephen Pope, chief global equity strategist at Cantor Fitzgerald.

CEBS will soon morph into the European Banking Authority (EBA), which promises to be operational by January 2011 but is still subject to a vote in the European Parliament at the end of September. 

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