Stress tests: everyone wins, everyone loses

The investigations into European banks were no ‘stress test’, but a pan-continental PR exercise. Nearly every bank passed. That means we all lose, says James Ferguson.

The European bank stress tests: a huge relief, or a complete whitewash? Officially, only seven of the 91 major banks tested (representing two-thirds of all Europe's banking assets) failed. That sounds pretty good too good to be true, in fact. The only banks that failed were ones that were already in the process of being rescued. And even under the most adverse assumptions, the amount needed to keep the sector well capitalised was put at an almost ludicrously tiny e3.5bn. This wasn't a stress test. It was a pan-continental PR announcement.

So can we ignore the tests as irrelevant? Bond markets showed their near-total disdain by doing practically nothing after the results were announced. The Libor-OIS spread, the benchmark cost of three-month interbank loans, worsened slightly. And bank sector CDS spreads widened, signalling that the risk of default had risen after the tests. But nothing dramatic happened.

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James Ferguson qualified with an MA (Hons) in economics from Edinburgh University in 1985. For the last 21 years he has had a high-powered career in institutional stock broking, specialising in equities, working for Nomura, Robert Fleming, SBC Warburg, Dresdner Kleinwort Wasserstein and Mitsubishi Securities.