Today is “Stress Day” – the day when the results of the “stress test” exercises performed on all major European banks will be released after the end of the European business day (but right in the middle of the American business day!). The Financial Times column Alphaville has a handy round-up of articles on the subject, compiled by Gwen Robinson. The most comprehensive guide – perfect if you’re still unsure of what these “stress tests” are all about and have some time – is by far the contribution from Anne Seith of Der Spiegel. (Rest assured: it’s in English. As for Alphaville itself, better enjoy that while it’s still free and available to all!)
Then there is the report by Anne Michel in Le Monde, also cited in the FT Alphaville round-up. Why is everyone so stressed about these “stress tests”? Mainly because banks can only “pass” them or “fail” them, and failure could carry a high price in terms of loss of investor confidence, for starters. Indeed, the impact is likely to be even greater than it was for the ten banks (out of nineteen tested) which “failed” during the American “stress test” exercise carried out back in May, 2009, for banks that fail by definition need recapitalization and there is a dwindling number of European governments still able to provide that. It’s notable, as Mme. Michel points out, that European authorities have staged such “stress tests” twice before, namely dry runs in August of 2009 and April of this year with a more limited selection of banks, whose results have never been made public.
But this time it’s serious, and all results will be released publicly. Naturally, everyone would love to jump the gun and get word of at least some of the results before they’re released to the unwashed masses (there’s potentially money to be made, for one thing). Mme. Michel does her best to oblige. It looks like all the French banks involved – namely BNP Paribas, Société générale, Crédit agricole and BPCE – have passed the test. Indeed, the failures are expected to come only from the usual suspect nations: Spain, Greece, and Portugal. Oh, and Germany, too – but the one German laggard is likely to be the Hypo Real Estate Bank, which already got into so much trouble back in 2008 that the German government fully nationalized it. (Note that this last bit does not come from Mme. Michel’s article, but from another of my on-line sources.)
Going back to the star banking pupils from France, such seeming across-the-board success inevitably raises questions as to the stress tests’ legitimacy. The article does go into some detail about how the tests’ parameters have been toughened up to include some degree of sovereign debt default, placed on top of a posited recession of 3% negative economic growth lasting over a year-and-a-half. But will this go far enough to convince the markets that all this has been a worthwhile, bona fide exercise? That is probably what most EU officials and bank executives are stressed-out about most of all.