EU places faith in bank stress tests to curb debt crisis fears

The publication of stress tests by the European Banking Authority is supposed to reduce the uncertainty hobbling banking activities by showing which banks hold how much in bonds issued by Greece and other shaky eurozone governments.

While officials are downplaying the possibility of a Greek default, the exercise aims to publicly identify weak banks so national regulators can push them to strengthen their finances. That in turn could help them absorb losses and limit the blow to the overall European economy if Greece or another country eventually can't pay back all its bond debt.

Banks are a key part of Europe's debt crisis because they hold billions in bonds from financially troubled governments. A default or other losses on those bonds could hurt banks and choke off credit to businesses — creating a credit crunch like that after the 2008 collapse of U.S. investment bank Lehman Brothers.

Estimates of the number of European banks that might fail run as high as 15, compared to only seven that flunked last year. The 2010 stress tests were widely regarded as a failure after Irish banks that passed had to be bailed out by the government by the billions only weeks later.

This time, banking regulators have been trying to walk the fine line between being tough enough to be believable and not rattling nervous markets with more bad news.

Banks must show they can maintain adequate resources to absorb unexpected losses even during an adverse scenario in which growth falls 4 percentage points short of European Union estimates in 2011 and 2012. That comes out to a fall in gross domestic product for the 17-member eurozone of 0.5 and 0.2 percent.

The gloom-and-doom scenario also includes a fall in real estate, stocks and the U.S. dollar.

One key new measure will be detailed information on how much each bank holds of shaky government bonds from Greece, Portugal and Ireland — by country, amount and bond.

1|2|Next Page>>

PrintEmail

Write a Comment

Terms

Enter your comments - 3000 characters max

Type in image code

Submit

 Receive China Post promos
 Respond to this email