European Stress Tests: The Smoking Gun

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.

Ravi Nagarajan submits:The Committee of European Banking Supervisors (CEBS) released the much anticipated results of the EU wide banking stress test exercise Saturday afternoon. Seven banks failed the stress test and will require a combined total of €3.5 billion of new capital.

Alicia Damley submits:Underwhelming might be the best way to describe the results of the European bank stress tests and the market’s reaction to them. Paying heed to market demands, the Committee of European Banking Supervisors (CEBS) released informative details on the stress test assumptions, which reveal that the adverse scenarios were not particularly unpleasant.

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.

John M. Mason submits: We have been given Quantitative Easing 2 ((QE2)) by the Federal Reserve System in the United States and now we are facing Stress Tests II ((ST2)) to be imposed on banking institutions in the European Union. Will we eventually be facing Financial Reform Act II ((FR2)) that will incorporate the next round of regulatory reforms of the financial system of the United States?

By Marc Chandler:Spanish officials will likely find comfort in the results of the latest stress tests. They can still feel as if the 100 bln euro line from the EFSF/ESM (European Financial Stability Facility/European Stability Mechanism) will be more than sufficient. In fact, a formal request for the funds may be made within days.

As the dust settles around Friday's European bank stress tests, and analysts begin poring over the wealth of new bank data, it's hard to find anybody in the financial markets who was impressed by the toughness of the exercise.