Bank stress tests no silver bullet for EU economy
- Source: Xinhua
- [08:44 July 25 2010]
- Comments
Sighs of relief could be heard across Europe as the continent's stress tests on banks flunked only seven of the 91 participating lenders. But it's too earlier to be cheerful, because the results are no silver bullet for ending Europe's economic woes.
Overwhelmed by the dual crushing impact of the global financial crisis and debt crisis, the EU banking sector seemed to be trapped into a vicious cycle. And lack of accurate information about the health of the EU banks just accelerated the depletion of investors' confidence.
Under such circumstances, Europe finally decided to borrow the idea of its transatlantic ally and gave a "physical examination" of its ailing banks. The United States ran a similar stress test last year on 19 of its largest banks. The results, though indicating 75 billion US dollars were needed for these lenders to withstand a possible worsening of the recession, did lift the cloud of uncertainty hanging over the economy.
When the European figures were published on Friday, the euro exchange rate went up but a clearer picture of the tests' effectiveness will come next Monday when the European stock markets reopen.
In a joint statement issued after the results came out, the European Central Bank and the European Commission welcomed the transparency of the tests, saying: "The results of the test confirm the overall resilience of the EU banking system to negative macroeconomic and financial shocks, and are an important step forward in restoring market confidence."
On the other hand, critics and skeptics are questioning the credibility of the Europe-wide test, labeling it as not tough enough. Some even said the test only delays the day of reckoning. The comments show the tests may not reverse the withering confidence. And their doubts are reasonable.
For one thing, there is a question mark hovering over the objectivity of the tests. While overseen by the London-based Committee of European Banking Supervisors (CEBS), the tests were done by respective EU national regulators.
The tests also failed to address the situation of a sovereign default because the EU will not allow any of its member states to go under. Yet investors certainly do not rule out that possibility.
Some people are cautiously optimistic about the results and others are suspicious. There are also those who see roots of future disasters.
Spain, as expected, hosts the most test-failed banks, with five of its small local banks believed to have insufficient capital to weather future adverse shocks following the collapse of the country's property boom. Thus Spain may be the source of a new round of financial meltdown.
For these banks, publicly confirming their weakness, as the tests did, will add to their woes as investors steer well clear of them. And their potential collapse may also rattle the financial market.
With all the pros and cons of the tests, it would be naive to believe that they could redeem the financial sector's past mistakes. To restore market confidence and steer its economy out of the debt crisis, Europe has much more to do.
