Eurobank Stress Tests: A Failed Confidence Ploy

As much as this blog was a persistent critic of the US version of the stress tests, I must hand it to the folks at the Treasury: they did an impressive job of dressing up and selling a garbage barge. The combination of consistent cheerleading, extend and pretend, and a few short squeezes did wonders for bank stock prices.

The European version, like most movie sequels, was a shameless rehash that relied overmuch on franchise value. The European authorities really seemed to believe that “stress test” was a magical invocation that would strike terror in the heart of market demons and Euroskeptics. And the rally in the euro and the retreat of Euroworries from front page news would seem to support their belief (although good economic reports out of Germany were probably an even bigger confidence-booster).

But the European stress tests looked to be a Potemkin process. The tests were wrapped up with remarkable speed, the sovereign debt loss assumptions were laughably low, many other elements of the test were not made public, and, as in Lake Woebegone, (almost) all the children were above average.

Not surprisingly, the tests have failed to quell doubts. The Financial Times reports:

Leading UK and continental European companies are increasingly shunning banks from Spain, Italy and even Germany because they do not believe the Europe-wide stress testing of banks gave a true picture of their financial health.

Corporate treasurers from groups with revenues of more than $240bn told the Financial Times they were conducting their own tests to gauge for themselves banks’ robustness…

“There is an element of whether the emperor has any clothes on and what to do if he doesn’t. The stress tests were a joke,” said the treasurer of a large European media company…

Treasurers are now also paying close attention to credit default swaps – the price of protection against a bank defaulting on its debt – as well as to share prices…Companies said they regularly adjusted the limits on how much risk they would take on any one bank via cash deposits, derivative contracts or loans.

A treasurer at a FTSE 100 company in the UK said: “We have no business with Spanish banks and a couple of Italian and German banks. If US banks are refusing to deal with these guys, then why should we?”


Originally published at naked capitalism and reproduced here with the author’s permission. Opinions and comments on RGE EconoMonitors do not necessarily reflect the views of Roubini Global Economics, LLC, which encourages a free-ranging debate among its own analysts and our EconoMonitor community. RGE takes no responsibility for verifying the accuracy of any opinions expressed by outside contributors. We encourage cross-linking but must insist that no forwarding, reprinting, republication or any other redistribution of RGE content is permissible without expressed consent of RGE.

One Response to "Eurobank Stress Tests: A Failed Confidence Ploy"

  1. Guest   September 21, 2010 at 4:49 am

    You are correct. The banks are far worse off than they are letting on. Germany is probably the worst off. The propaganda machine obviously still alive and well,help the masses believe whatever they see and hear from media sources. FACT: Every single Landesbank in Germany is broke. REASON: They are delusional. They invest internationally and most have offices in such places as New York or London. QUESTION: Why would a “Landesbank” try to invest or represent themselves outside of their limited regional jurisdiction? The purpose of a Landesbank, is to provide project financing and capital for the region in which it is located, FULL STOP. They were not intended to be used as retail banks, but rather for supporting the businesses and city/town infrastructure within their region, and to provide them with capital, they in turn recieve from the federal level. This in turn, provides oversight as the Federal system controls the flow of capital to it’s Landesbanks through it’s Central or Bundesbank. They should actually be forbidden by law to operate outside of their region, thereby always having enough safe capital on hand, ONLY for the purposes mentioned. Their mission should not be turning a profit. All banks will turn profits, but risidually not as a main goal.By overextending themselves through a series of high risk investments, most German Landesbanks invested in MBS in the US or other toxic financial products, then they turn around and blame the US, as they always do. Germany would do well to first learn more about the financial world, establish a serious market and quit comparing themselves to the US. There is no comparison between a Socialist State and a Democracy with a Free Market system that rewards those who can, instead of punishing them through maniacal series of laws designed to make everything profitable only for the State, creating only more of those who can’t.