After the European Bank Stress Tests

There are somewhat good news for the EU economy today insofar that only 7 of the 91 tested European banks failed their stress tests, coordinated by the European Commission office. The failures are mainly concentrated in Spain and the reason for this may be not so much the bad state of the Spanish economy but the peculiar way the whole exercise was devised.

Alicia Damley submits:At the end of this week, results of the second European bank stress test exercise begun in March 2010 will be released. Given the EU’s structure, these tests have been finalized by Committee of European Banking Supervisors (CEBS) and the national supervisory authorities, in close co-operation with the ECB.

An interesting article via Euromoney (January 14, 2013) on European banks facing EUR400bn in capital shortfall estimated by the OECD.A quote:"A chief gripe is the extent to which European banks have refused to acknowledge their losses and write down bad loans, echoing the comedy of errors that has blighted Japan in recent decades.

By Alicia Damley:After months of indecision, last week saw movement in the European sovereign debt and European bank sector crises. As key details of the response have emerged, more useful analysis has been enabled.

Research Recap submits: This European Banking Authority’s proposed third round of bank stress tests can hardly do worse than last year’s fiasco that was followed by the failure of Irish banks that had passed the test. But this year’s model still lacks credibility and risks further undermining confidence.

Alicia Damley submits:For more than a year Europe has been muddling through finding a solution for its twin crises of sovereign debt and banking. With economic growth weak outside Germany, trouble sequentially spread to Greek, Irish, Portuguese and Spanish government debt, with spreads widening vs German bunds. In each of these countries, the banking sector has faced difficulties, inter-related to government debt spillover, increased bad debt, funding squeezes and weak capital position.

Marc Chandler submits:The market appears to have so much to worry about that it is having difficulty choosing what to focus on. The immediate interest is on the details of the European bank stress tests.