INTERVIEW: Expert: Stress tests "just declared the corpses as dead"

By Marion Trimborn Jul 24, 2010, 12:40 GMT

Brussels - Europe, according to the Centre for European Policy Studies chief Daniel Gros, wasted an opportunity when it published its so-called bank 'stress tests'.

On Friday the Committee of European Bank Supervisors (CEBS) declared that 84 of 91 European banks tested had passed the challenge, and were strong enough to withstand a severe recession combined with a sovereign debt crisis.

But CEPS, one of Europe's highest profile think tanks, believes that the tests were of limited usefulness.

'The stress test declared the corpses as dead,' Gros told the German Press Agency dpa in Brussels.

'We know a bit more now about where the shaky candidates are. But the test didn't bring any real insights,' he said.

Of the seven banks that failed the test, the decisive factor for which was whether core capital fell below 6 per cent of liabilities under the recession and sovereign debt scenarios, five were from Spain and one each from Germany and Greece.

The economist criticised the 'whitewashed' criteria for the tests, which had been tinkered with for so long, until they could give up no more surprises, as a 'wasted opportunity to really clean up the banking sector.'

Among the broadly levelled criticisms of the tests was the charge that they did not foresee a full-scale debt default by a eurozone country, as could have been the case with Greece in 2010, and that the tests only took a narrow definition of sovereign debt holdings into account.

Gros says that the US, which underwent a similar bank examination in 2009, did a better job.

'The Americans went at it more decisively, and forced the weak banks to take capital from the state,' he said.

Of the European banks, 12 of the 81 'passed' institutions are deemed to have only just scraped through, including several of the German regional banks.

As a result, Gros predicts that Europe's banks will remain under stress, because they were not 'outed' in the same way as the US banks were.

'Here in Europe, there are just too many legal and political caveats against such steps,' he said.

Gros adds that in Europe too many banks have too little of their own capital and are too closely reliant on each other.

'If a large bank fails, the whole system would be in danger,' he says.

However, Gros says, ironically, despite these perceived failings, the stress tests will have served their purpose.

'They were conceived as a calming medication, and they will have that effect,' he says.

On Friday evening after the tests' publication, the New York Stock Exchange scarcely reacted. European markets will show their first reaction only after the weekend.

To really test the crisis resistance of the European banking system, Gros advocates a stress test for the European Central Bank itself.

'The ECB has bought Greek sovereign debt to a great extent. We have to run through what would happen, if these bonds were defaulted,' he says.

Internet: www.ceps.eu