Finance ministers split on ‘damned’ stress tests


As EU countries embark on another round of bank stress tests, disagreement is rife on whether the tests should probe liquidity and sovereign debt exposure. Analysts say ministers are "damned if they do and damned if they don't".

In another round of talks on saving the euro zone from financial ruin, ministers are gearing up for a fraught discussion over breakfast this morning (18 January) on how rigorous tests of the bloc's banking sector ought to be, according to an internal note seen by EURACTIV.

Analysts say ministers are stuck between a rock and a hard place as a predicted poor performance by EU banks in an upcoming set of stress tests would spell either further EU loans for beleaguered economies or wholesale restructuring of the sector.

According to sources, ministers disagree on which outcome they would prefer and have, as far as the note shows, scarcely agreed how the tests should be conducted or how failing banks should be rescued.

Sovereign debt?

According to the note, EU countries disagree on how they should measure a bank's exposure to sovereign debt and whether the test should look at a bank's trading or its banking books. Analysts poured scorn on the last round of tests because they focused on banks' trading books alone.

Trading books are typically a bank’s more liquid portfolio of securities, whereas a banking book shows assets that a bank intends to pay off later, i.e. they are held to maturity.

Though the note stresses the importance of having credible "backstops" if a bank fails, ministers are also split on the kind of safety nets that should to be used.

Analysts are arguing that ministers should prepare for the worst and begin to draw up plans to restructure economies and banks already, especially with regard to Greece.

"The only real solution is to prepare for Greek restructuring concurrently with stress tests," argues Sony Kapoor, a former Lehman brothers banker and founder of the ReDefine think-tank.

"Regulators are in a bind. A failure to stress test for Greek debt restructuring will simply not be credible. Including this possibility in the stress tests may be interpreted as an official sanction to restructuring and will spook markets," Kapoor continued.


The inclusion of banks' liquidity is also up for discussion, as the note describes unnamed countries as being "reserved as to the outcome of possible liquidity risk stress testing".

A spokesperson for the European Banking Authority (EBA), the umbrella supervisor co-ordinating the tests, insisted that liquidity will be tested in a separate exercise to the planned stress tests.

Ministers are allegedly at odds over whether to factor in central banks' assumed liquidity assistance, and in particular aid from the European Central Bank (ECB), which has been an unlimited lifeline of support for the bloc's defaulting banks since the crisis began in 2008.

Analysts are warning that many Irish, Greek, Portuguese, Spanish and even some German and French banks will fail the tests if they do not include these assumptions on ECB liquidity.

"Ministers are damned if they do, and damned if they don't. That is why discussions are getting really fraught," Kapoor added.

Last year a mere seven of 91 banks failed the tests, including Germany's bailed out lender Hypo Real Estate, the Agricultural Bank of Greece and the Diada Savings Bank of Spain. 

Madrid has lent its banks about €10.6 billion, while Irish banks, none of which failed the last round of tests, have received over €50bn in liquidity assistance from their central bank in addition to over €130bn from the ECB. 

The EBA plans to publish the test results in early June. 


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.

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.

The July 2010 stress tests were greeted with a mixture of cynicism and relief. Amid market doubts over their toughness, German banks stood accused of hiding their exposure to sovereign debt

Six of the 14 German banks tested did not disclose their exposure to sovereign debt, one of a few key benchmarks in an exercise designed to test banks' resilience to future economic shocks.

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