What would happen if the banking system and the recession were getting worse and worse, if it turned into depression? By submitting the major Wall Street banks to “stress tests”, tests for resistance to a severe crisis scenario, the United States responded to this question, and on May 7, Europe had no choice but to comply, in turn, to the same query.

Tuesday 12 May, the European Union reported that “stress tests” would be put in place by September to test the strength of its banking sector. Approximately 25 schools – including BNP Paribas, Société Générale, Commerzbank, Deutsche Bank, Santander, Unicredit …- whose bankruptcy would be likely to endanger the entire financial system could be involved.

[ad#usafis468ad1]

The exercise had been claimed by the International Monetary Fund (IMF), as an act of transparency essential in solving the global crisis. According to the organization, “the admission of losses is incomplete and bank capital is insufficient in a recession scenario.”

ESTIMATION PESSIMISTIC

The IMF calculates that the crisis could cost a total of 1 200 billion (876.6 billion euros) in Europe by 2010. The bulk (61%) of that cost would be borne by banks. According to the organization, and European institutions should collect about $ 600 billion to get back afloat.

Is this figure correct? It is a figure that meets the estimate but it is considered overly pessimistic, according to European sources, that the Member States decided to engage in these tests of strength.

The decision was taken on May 5 at the last meeting of the council of European finance ministers, at the suggestion of the Committee of European Banking Supervisors (CEBS). “The general idea of the Europeans to show a degree of transparency equivalent to that of the U.S. government, giving an accurate picture of the risks remaining in the” pipeline “bank”, says one close to the European regulatory authorities.

Member countries CEBS to entrust the task to lead the audit of banks. It will delegate operational responsibility for national regulators – for example, the Commission Bancaire in France. The scenario for recession will be the European Central Bank (ECB), adapted country by country.

For investors, facing uncertainty about future losses for European banks, “these” stress tests “are necessary, said Elisa Parisi, an analyst at RGE Monitor in New York, research firm headed by economist Nouriel Roubini. “Now that the United States has done the work, the market needs to know what is the history in Europe,” she adds.

After the episode of subprime, these toxic assets are the representation of the loss of abysmal, new risks hanging over the sector. With the economic crisis and soaring unemployment, many loans contracted by companies and households may not be reimbursed, resulting in further losses for institutions.

“In Europe, the main risk is based on the Eastern European countries if the situation deteriorates too much, it could jeopardize some French banks,” says Romain Rancière, professor at the School of Economics in Paris.

The exercise of transparency promised by the Europeans, will have its limits. In contrast to the United States, who made public the results of these tests bank by bank, governments in Europe do not seem willing to communicate these results in detail. They fall to the views of banking supervisors, followers of secrecy. “If so, it is a pity, the advantage of stress tests is to increase transparency and information, to avoid false reassurance with scenarios that are too mild, if not publication, it loses some of these benefits, “says Laurence Boone, an economist at Barclays.

Nicolas Véron, an economist at Bruegel, agrees with this analysis: “Europeans are uncomfortable because they have no framework for public action to achieve these tests”à American”, nor real desire to do so,” he says.

“It will be up to national authorities to force the banks to recapitalize and to encourage them to do so as soon as possible, coordination will be critical,” concludes Luc Everaert, head of regional studies at the IMF.

[ad#yhoolstor468ad1]

One Response to “European Banks Submit To Tests Of Resistance”