Business

Eurozone stress tests that stress investors

BBC business editor Robert Peston on the stress tests for European banks

The European Union's attempt to reassure investors that European banks are in reasonable health - by undertaking so-called stress tests on them - is shaping into a bungled exercise that may sow alarm rather than calm.

The names of the 100-odd banks being tested were supposed to be published today, along with details of the endurance tests to which they would be subjected.

The idea is that banks would have to demonstrate that they could remain solvent, even if eurozone economies continue to weaken and in spite of difficulties that some eurozone governments may have in paying their debts.

But investors' fears would only be allayed if the test results are published, if they are conducted in an open and transparent way, and if the stresses to which the banks would be subjected are realistic, not optimistic.

The tests are due in just over two weeks. But the German finance minister Wolfgang Schaeuble confirmed that individual banks may choose not to disclose the results.

And what may trouble investors even more is that the details they were expecting to receive this afternoon on the scope and substance of the tests, well none of that has been published, for reasons that have not been disclosed.

It would not be at all surprising if - in the coming 24 hours - the anxieties of banks' investors and creditors were to increase, with the damaging effect for eurozone banks that it may become harder and more expensive for them to raise finance.

UPDATE 19:34

At the eccentric hour of 7pm in Britain and 8pm on the continent, the Committee of European Banking Supervisors has published some of what was expected on the scope and scale of stress tests for European banks.

It says that 91 banks will be tested over the coming fortnight, representing 65 per cent of the EU banking sector.

What will reassure investors is that they include the Spanish and German savings banks which are deemed to be most fragile.

However bank investors and creditors may feel that the notional stresses to which the banks will be subjected are not described in enough detail - and some may also complain that the theoretical shocks which the banks have to withstand should be more severe.

The 91 banks will have to demonstrate that they would remain both solvent and liquid if the following adverse conditions were to pertain:

1) a 3 percentage point deviation from the expected course of GDP over the coming two years;

2) worse conditions in the government bond market than the pretty ropey conditions of early May.

Also for different countries, there would be different scenarios for the possible paths of GDP, unemployment and inflation.

On a superficial level, these tests don't look ludicrously easy to pass.

That said, the UK's Financial Services Authority thinks the tests are less difficult to pass than what it has forced on British banks. And as if to prove the point, it says it is already 100 per cent confident that Royal Bank of Scotland, HSBC, Barclays and Lloyds have all passed the European tests.

Also, the EU tests sidestep the issue that probably matters most to investors and creditors: what would happen to the banks if a Greece, or a Portugal or a Spain actually defaulted on what they owe?

It's all very well to tell banks that they need to assess the impact on their capital of a fall in the market price of Greek government debt, or Portuguese debt, or Spanish debt. But if a bank doesn't use mark-to-market valuations for all or some of their government bond holdings, then this would be an irrelevant test.

As I noted earlier, I fear that the way the EU is going about these tests will unsettle rather than reassure the banks' creditors and investors.

You can keep up with the latest from business editor Robert Peston by visiting his blog on the BBC News website.

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