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European bank stress tests: "a joke"?

By Dylan Mathews

Seven of the 91 European banks failed worst-case-scenario stress tests measuring how they would hold up if the continent's government debt crisis worsens. The European Union said the results should comfort those worried about the health of the financial sector. But not everyone was so sure.

Here's how economists and other commentators across the blogosphere are viewing the tests:

Gregory White believes the authorities running the tests gave the markets what they wanted them to hear:

European authorities made sure that banks passed. This is obvious, because had they not done this they would have created a new crisis.

But they also made sure that markets chief doubt, the state of sovereign debt on European bank's balance sheets, remains in complete doubt. If more details on sovereign debt holdings are released shortly, then perhaps this can be overcome.

Joe Weistenthal concludes the tests were a joke:

* The adverse economic scenario was for a small decline.
* The total capital needs of ALL the failed banks was just 3.5 billion euro.

* Only 7 banks failed, and the two big ones are already nationalized.

* Only one Greek bank failed.

Verdict: joke.

Felix Salmon thinks the very existence of the stress tests is a good sign:

Was there any point in doing this test? I think so, yes. It got all the European national bank regulators talking to each other and cooperating more than they do normally, and thinking hard about important questions related to the solvency of the European banking system. The test itself was weak, to be sure. But the Committee of European Banking Supervisors has a lot of granular information now which it can try to use for the purposes of crisis prevention. Whether it will or not is unclear, as is whether it will succeed if it tries. But its very existence is probably a good thing.

Daniel Indiviglio argues the market only cares about stress tests because of the potential for a bailout:

There's a key difference between a credit rating agency saying a bank is safe and the government saying so. If the agency is wrong, all it can do is shrug. If the government is wrong, it can apologize for its mistake and make good on its claim with a bail out. Moreover, there's a strong argument that the government will do exactly that, if it previously indicated that the firm was healthy. It is, after all, the authority. If it's wrong, the market shouldn't have to suffer -- particularly when the government has the ability to bail out investors who trusted the stress tests.

By Ariana Eunjung Cha  |  July 23, 2010; 4:08 PM ET
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I am french, and i think you are totally right. European governments try to reinsure the credit rating agencies but any means. They try to manipulate them. Nevertheless, i would like to say, in Europe, the issue is not related to banks but it is related to governments. In France, the austerity plan is a joke. It is half the german objective to reduce the expenses by 45 billions in 3 years.
European governments have to give more guarantees to the market. Otherwise, i am almost sure credit ratings will be downgraded again and again for European countries.

Posted by: Anonymous | July 24, 2010 3:34 AM | Report abuse

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