EU serves up more fudge on bank stress tests

There were no nasty surprises in the latest European bank stress tests. But there is the usual whiff of “eurofudge” about the results.

Andrew Van Sickle
By
published
in Features

There were no nasty surprises in the latest European bank stress tests. Banks now have far more money set aside to cover potential losses. The tests' adverse scenario projected a decline in GDP of 1.7% in 2015-2018, worse than the 1% drop seen in 2008-2011.

Ireland had the lowest average ratio of capital to risk-weighted overall assets, says The Economist: 5.2%. Italy's was 6.5%, fuelling concern over Italian lenders' long-term solvency. No state had a negative ratio, which implies systemic insolvency. In 2014, several did.

Still, there is the usual whiff of "eurofudge" in these results. The tests didn't model the impact of a long period of low or negative bond yields, which undermine profitability. The adverse scenario was based on long-term yields spiking (implying falling bond prices).

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That seems unlikely to occur soon in a world of zero interest rates, says The Economist. The tests also only looked at 53 banks, compared with 2014's 123. Finally, banks from the struggling economies of Greece, Portugal and Cyprus were excluded, thus automatically skewing the overall picture.

Andrew Van Sickle
Andrew Van Sickle
Editor, MoneyWeek

Andrew is the editor of MoneyWeek magazine. He grew up in Vienna and studied at the University of St Andrews, where he gained a first-class MA in geography & international relations.

After graduating he began to contribute to the foreign page of The Week and soon afterwards joined MoneyWeek at its inception in October 2000. He helped Merryn Somerset Webb establish it as Britain’s best-selling financial magazine, contributing to every section of the publication and specialising in macroeconomics and stockmarkets, before going part-time.

His freelance projects have included a 2009 relaunch of The Pharma Letter, where he covered corporate news and political developments in the German pharmaceuticals market for two years, and a multiyear stint as deputy editor of the Barclays account at Redwood, a marketing agency.

Andrew has been editing MoneyWeek since 2018, and continues to specialise in investment and news in German-speaking countries owing to his fluent command of the language.

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